Personal Loan For A Home Down Payment

A reasonable down payment on a mortgage can reduce the amount you may need to borrow, and it also has the potential to make you qualify for lower interest rates. Overall, it can reduce the amount you will have to pay as interest.

However, applying for a mortgage loan can be intimidating if you don’t have enough to pay as a down payment. In a case like this, taking a personal loan may be a solution you are considering. In most cases, lenders will allow you to use a personal loan to fund your down payment. 

Though some lenders will let you use a personal loan as a down payment, it may not be your best option. In this article, you will learn about things to consider when obtaining a personal loan for a down mortgage and other tips for wisely choosing a means of settling your down payment. 

What Is A Home Down Payment?

A home down payment is usually paid in cash or cash equivalent as an initial upfront payment for purchasing a house. After which, a mortgage loan is obtained to balance the payment.

Raising the down payment may be difficult but paying it when buying a home is a great idea for some reasons, as discussed below.

Equity

Equity is the difference between the current worth of your home and the amount you owe in mortgage on it. A decline in your home value can make you owe more on your mortgage than the amount your home is valued. 

Making a down payment for purchasing your home boosts your equity and serves as a buffer for the fluctuations in worth that your home may suffer.

Chance To Avoid Private Mortgage Insurance

If less than 20%mortgage down payment is made, you may be paying private mortgage insurance to convince some lenders to lend you money for your new home. 

Paying private mortgage insurance tells your lender they are not at risk of lending you money. If you cannot pay, they can easily call on your mortgage insurance company. However, this extra insurance will only add to your monthly payments.

Less Interest And Lower Monthly Payments

A reasonable down payment will reduce the amount you will need to borrow. In addition, there is less interest to pay throughout your mortgage.

Furthermore, a smaller loan amount when buying a home means you will need to pay lower payments every month. 

Things To Know About Borrowing A Personal Loan

Personal loans are usually short-term and unsecured. A personal loan is one of the fastest-growing forms of lending. It results from lenders not asking why you need the loan. 

Lenders only care about if you will be able to repay the loan. They check your credit score and other necessary financial abilities. 

A personal loan is not often accepted as a down payment by most mortgage companies. They believe if you are taking a new debt to pay for an existing one, it signals you may not be able to afford the repayment of the mortgage loan you are applying for.

In extreme situations, a personal loan may be accepted as a down payment. It, however, should not be your first choice. If it is an option you want to consider, then you should understand some things to qualify for personal loans and to get the best available deal for your financial situation.

Interest Rates

When you apply for a personal loan, you must consider the interest rates. The higher the interest rate, the higher the overall loan amount and the amount you pay monthly.

You must go for personal loans with a low-interest rate since you will have to pay for your mortgage loan in addition to the personal loan you obtain every month. 

Origination Fees

Origination fees can directly affect your loan. Origination fees can reduce the loan you are given or increase the loan amount you are to repay. Make sure to avoid personal loan lenders that charge this fee.

Understand The Loan Repayment Terms

The loan terms include the period it will take you to repay the loan by sticking to the minimum payment schedule. There are several options available to you, depending on the lenders. 

In the shorter term, you are expected to make high monthly payments and a lower overall loan amount. On the other hand, the longer term implies low monthly payments and a higher overall loan amount. The option you choose depends on what suits you best. 

Credit Score

Before applying for any loan, you need to work on your credit score to qualify for such a loan. There is no exception for a personal loan too. 

Different lenders have their criteria for you to be qualified for a loan. Find out what credit score your lender requires and work on it. Do all you can also to reduce your debt-to-income ratio, and then you can make an application for a personal loan.

Discounts And Prepayment Penalties

Discounts can also reduce the overall loan amount you are to repay.  Some lenders from whom you have previously taken personal loans or with whom you have a bank account can offer you a discount on your new loan. Ask your lenders other ways you can qualify for a discount.

Another factor you need to consider is prepayment penalties. Some lenders will only allow you to pay your loan ahead of schedule for a charged fee. Ask lenders if they charge this fee before applying for a personal loan, and avoid loans that include this fee.

Prepare Your Home Down Payment

Before you apply for a home loan, submit all the necessary documentation and prepare to meet all the requirements. A down payment is one of the requirements you must make available.

If you are unable to save up your down payment, you may raise this through loans from friends, borrowing from retirement funds, personal loans, or you sign up for down payment assistance programs.