Can You Use a Personal Loan for a Home Down Payment?

Since 2018, first-time home buyers have typically made a down payment of about 6% to 7%, according to the National Association of Realtors. With the median sale price of a house sold in the U.S. totaling $436,800 as of April 25, 2023, that could add up to a down payment of about $30,576.

With a down payment costing so much, you may be wondering if it's possible to borrow for one using a personal loan, so you can get into a house sooner. Here's what the rules are with regard to using a personal loan as a down payment.

Your lender probably won't allow you to use a personal loan as a home down payment

If you are hoping to use a personal loan for a home down payment, you are likely going to be disappointed. The majority of mortgage lenders are not going to allow you to use personal loan funds as your down payment money.

Lenders don't want you to use personal loan funds because part of the point of a down payment is so you have some of your own cash on the line. If you've put thousands of dollars down on a home purchase, you're much less likely to just walk away and let the bank foreclose on it. That's not necessarily the case if you just borrowed that down payment money via taking out a personal loan, too.

A down payment is also supposed to show the bank you've been able to save money responsibly. Taking out a personal loan does nothing to show you've been diligent in saving for months or even years to be able to buy a home. You'll be considered a higher-risk borrower without providing proof of this financial discipline.

Lenders also don't want you to have too much debt when you borrow to buy a home. In fact, for many mortgage lenders, you'll have to keep total debt payments -- including your new housing costs -- to 36% or less of your income. If you take on a personal loan, you are taking on more debt and there's a greater risk of you not paying it back.

For all of these reasons, you most likely won't be able to use a personal loan as your down payment source. You'll need to save up money instead. And lenders will want documentation of where your down payment funds came from, so you can't just sneak that personal loan in there, either.

Using a personal loan would be a bad idea anyway

Even if you could find a lender who allows you to use a personal loan, doing so would likely be a bad idea. First, you'd be committing to multiple new monthly payments at the same time, which could cause you a lot of financial stress. And, second, without equity in your home, you'd risk owing more than the house is worth. This is called being underwater. If you had to sell soon after buying, you probably wouldn't be able to make enough to pay off your personal loan and the mortgage too.

Ultimately, while it may seem like a pain to wait and save up a down payment, doing so is the right financial move. You shouldn't try to buy a home until you have at least some money to put down on the property -- or you could end up regretting it.