Why you can’t use a personal loan to buy a house
Most mortgage lenders don’t allow homebuyers to use a personal loan as a down payment to buy a house. This is because the bank wants to protect its investment and needs to know you’ll be able to repay the loan. It doesn’t want you taking on more debt to pay off another debt.
There are two major reasons why using a personal loan for a down payment isn’t a good idea.
It can impact your DTI ratio
To determine how much of a mortgage you can afford, lenders examine how much of your income goes toward your debt payments. Your debt-to-income (DTI) ratio details how much debt you have in relation to your income. Credit cards, car payments, student loans and personal loans all impact your DTI ratio and the overall mortgage amount you’ll qualify for.
Most lenders require a DTI ratio under 43%, though some lenders may require a lower ratio. If you take out a personal loan, doing so may disqualify you for a mortgage if your DTI ratio is too high.
It shows you’re not ready to buy a home
If you take out a personal loan for a down payment, that could signify to a lender that you’re not ready to buy a home. As a result, your mortgage application could be denied.
“Using a personal loan may raise questions about the borrower’s financial stability and ability to handle future mortgage payments,” said John Grace, founder and president of Investor’s Advantage Corp., a financial advisor. “Lenders closely evaluate the source of funds for down payments, and relying on a personal loan might lead to additional scrutiny of the borrower’s financial situation.”
Alternatives to using a personal loan for a down payment
There are several alternatives you can look into if you need help with a down payment.
Find a first-time homebuyer program
Many states and cities have first-time homebuyer programs that can provide 100% financing or help you with a down payment and other costs.
For example, in Rhode Island, first-time homebuyers can qualify for 100% financing, meaning no down payment is required. Residents can also qualify for assistance with a down payment or closing costs.
» MORE: How to get down payment assistance
Look into loans with lower down payment requirements
If you need help with a down payment, there are many government-backed programs out there that can help.
- Federal Housing Administration (FHA) loans: FHA loans allow down payments as low as 3.5%. They typically include lower closing costs than traditional loans and easier credit qualifications.
- U.S. Department of Agriculture (USDA) loans: If you purchase a qualifying rural home, you may be able to use a USDA loan, which doesn't require a down payment. You’ll have to pay for private mortgage insurance (PMI) and meet income and property eligibility requirements.
- Veterans Affairs (VA) loans: VA loans are available for military members, veterans and eligible family members. These loans don’t require a down payment and you won’t have to pay mortgage insurance, either.
Ask for help with a down payment
Having a friend or family member cover a down payment, either as a gift or an interest-free loan, isn’t for everyone. But if you have a relationship with someone who can help you, it could be worth asking for assistance. You can ask that person to deposit the amount into your account as soon as you’ve figured out a payment agreement. If it’s a loan, your lender will add it to your DTI. If it’s a gift, your lender may ask the giver to sign a gift letter to legitimize the transaction.
Take the time to save
For some people, all it takes is more time. Come up with a budget so you know how much you need to save each month to reach your savings goal.
FAQ
How much is a down payment for a home?
Typically, homebuyers put down anywhere from 3% to 20% for a home. It’s generally recommended that homebuyers put down 20% for a home so they won’t need to pay for PMI. PMI costs around 0.5% to up to 6% of your total loan amount and protects your lender if you aren’t able to make payments. After you reach a loan-to-value (LTV) ratio of 80%, you can usually remove PMI and save some money on your monthly payments.
What can’t you use a personal loan for?
You generally can’t use a personal loan as a down payment on a house or to pay your college tuition. However, you can use a personal loan to consolidate debt or pay for financial emergencies, weddings, vacations or medical bills, among other purposes.
What other costs come with buying a house?
In addition to a down payment, you can expect to pay 2% to 6% of your home loan amount to cover closing costs on your new house. So, if your mortgage is for $400,000, your closing costs could be $8,000 to $24,000. Renovations might also be something to budget for, depending on the condition of the house.
Bottom line
Navigating the path to homeownership can be frustrating, especially if you don’t have the down payment you need when you find the right home. While using a personal loan may seem tempting, it likely won’t work. Most lenders discourage or even prohibit homebuyers from using personal loans for their down payment.
Yet, there are many alternative paths to coming up with a down payment. Whether you tap into specialized programs like FHA loans or USDA loans, lean on local initiatives or leverage a personal relationship for help, options exist for your unique financial scenario.
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Federal Reserve Bank of St. Louis, “Average Sales Price of Houses Sold for the United States.” Accessed Nov. 24, 2025.
- U.S. Department of Veterans Affairs, “VA Home Loans.” Accessed Nov. 24, 2025.
- RIHousing, “Buyers.” Accessed Nov. 24, 2025.
