Generally, you don’t want to take out any new debt while you’re in the process of closing a mortgage loan.
Also, after you’ve closed on a loan, you probably want to wait three to six months before taking out a personal loan.
Personal loans can be handy for homeowners, and there’s no official rule that you can’t apply for one when you’re shopping for a house.
But doing so might have unforeseen consequences:
- Your credit rating may take a hit and affect your loan rates
- Your debt-to-income ratio may increase and affect your mortgage eligibility
- If you’re already working with a mortgage lender, they may be alerted to your loan activity
- You may even impact your mortgage loan eligibility even if you’ve already been cleared to close
If you’re still unsure of whether you should take out a personal loan when buying a home, here’s an infographic that can help you understand:
Should You Get a Personal Loan When Buying a Home? Do’s and Don’ts
Before or shortly after the home-buying process . . .
- Try and take out a personal loan to pay for the down payment.
- Intend to borrow to pay for closing costs, inspections, moving costs, etc. with a personal loan.
- Take out a loan at all if you plan to apply for a mortgage soon, in general.
- Attempt to hide personal loan activity from lenders.
- Use a personal loan for expenses like furniture, repairs, renovations, and non-mortgage expenses well after you’ve already settled in your new house.
- Consider waiting until after the mortgage is completed to take out a personal loan.
- Ask your loan officer, when in doubt.
- Understand what mortgage lenders are looking for: favorable debt/income ratio, steady income, and no surprises.
Can You Pay the Down Payment for a House with a Personal Loan?
No, most lenders will not let you pay for a down payment with a personal loan.
Expenses related directly to the sale—such as appraisals, inspections, and down payments—are best paid for with cash or from money borrowed directly from the mortgage lender.
Note that this applies to more than just personal loans. Even borrowing from friends and family can sometimes have unforeseen consequences. Because often, mortgage specialists review your financial activity to see how long you’ve had your money. Any sudden large increases may have to be explained to the potential mortgagor, which may hurt your chances to qualify for a mortgage.
Help! I Bought a Home and Now I’m “House Poor”
If your mortgage payments are taking up much more than the suggested 25% of your take-home pay, you may become financially constrained, aka “house poor.”
This can be a tricky situation to manage. Here are a few ideas if you’re facing a housing-related financial crisis:
- Rush to pay off 20%. If you haven’t put down a 20% down payment, you’re likely playing Property Mortgage Insurance, typically a $1,500-30,000 annual cost. PMI usually goes away once you’ve got one-fifth of the principal paid off.
- Limit your spending. Mortgages are fixed expenses—there’s rarely any wiggle room for reducing costs there, unfortunately. So your only option is to try to lower expenses that you CAN control, such as monthly groceries, entertainment, and subscriptions expenses.
- Get a side hustle. There may be some online work you can do right from your couch, such as audio transcription, market research, or freelance writing. Read more about possible side-hustles here
- Borrow wisely. It’s generally not a good idea to take on more debt if you’re already struggling to make repayments. Best to save the loans for emergencies, such as when the plumbing breaks.
When in Doubt, Ask Your Mortgage Officer
Personal loans can come in handy for homeowners seeking improvements or repairs. But they can be tricky to use close to home-buying time.
In any case, you can always ask the agent you’re working with if taking out a personal loan is a good idea. Each mortgagor is different and most want to help you have a successful homebuying experience, so it’s generally beneficial to rely on their assistance.
Thinking About a Loan for Home Renovations Or Repairs? Read More About Our Personal Loans For Homeowners>>>