Can I Use a Personal Loan to Buy a House?

Why personal loans aren’t ideal for buying a house

The average home price in 2025 is several times higher than the typical maximum amount of a personal loan. Most personal loans are capped at around $100,000, even for those with stellar credit scores. That means that, while a personal loan can be used for almost any purpose, it doesn’t offer enough funding to purchase a house.

Since a personal loan won’t cover the whole amount of the home, you might be tempted to use funds from a personal loan for closing costs or even a down payment. But most traditional mortgage lenders won’t allow this, said Jacob Naig, owner of We Buy Houses in Des Moines. “Personal loans are not meant to be used for long-term, high-value assets like real estate.”

In rare cases, a personal loan can be used to buy a home. For example, it can work for a tiny home or other low-cost property. You could also use one for an all-cash purchase, which has fewer restrictions since no mortgage is involved.

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Using a personal loan to improve mortgage eligibility

A personal loan usually isn’t enough to cover a full home purchase, but it can sometimes work for cash buys or low-cost properties.

Many future homeowners turn to personal loans to help them get their finances in better shape before attempting to obtain a mortgage loan. For example, if you’re carrying a lot of disparate debt but you have a decent credit score, a personal loan can help you consolidate your debt in one place and pay it off faster or with a lower interest rate.

This can be incredibly beneficial to your financial bottom line since you can receive better loan terms when it comes time to purchase a home.

Here are some ways using a personal loan to tidy up your finances can help with a future mortgage approval process:

• Your debt-to-asset ratio can improve
• Your credit score can improve as you pay down debt
• You could free up monthly cash to put toward savings
• You might qualify for a lower interest rate
• You might free up funds for a down payment, which can eliminate the private mortgage insurance requirement

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Pros and cons of using a personal loan for home buying

The main advantage of using a personal loan toward a home purchase is speed, said Naig. “Being able to launch a personal loan and having it approved and funded really fast — often within three days — could mean the difference between missing out on a competitive all-cash offer or losing an investment opportunity that is particularly time sensitive,” he said.

But, he urges, the downsides are significant. Most notably, personal loans aren’t secured against the property, which means you’ll face higher interest rates along with stricter terms and credit requirements.

And even if your lender allows you to use a personal loan for a down payment or for closing costs, this should be disclosed early on in the process. Once you’re headed to close, any change to your financial situation (such as taking out a large personal loan) can cause the deal to fall through.

Alternative ways to finance a home purchase

In most cases, you won’t be able to use a personal loan to assist with a traditional mortgage transaction. But even if you could, there are several other options that are better choices if you need additional funding for closing costs or a down payment, or if you need a more flexible mortgage option:

• FHA loan: Naig suggested applying for an FHA loan if you’re a first-time homebuyer who’s having a difficult time saving up for a large down payment. These loans can often be obtained with a down payment as low as 3.5% of the purchase price or assessed value — and with less-than-perfect credit scores.
• USDA loan: If you’re seeking a home in a rural area, Naig suggested that you get a USDA loan. These loans allow rural homebuyers to skip the down payment altogether as long as the property being purchased is in a qualified location.
• VA loan: Current or former military personnel can turn to the VA loan, which is a boon for homebuyers since there’s no down payment requirement.
• 401(k) loan: Most lenders will allow you to borrow money from your 401(k) for a down payment. While this is preferable to using a personal loan for this purpose, it’s important to keep in mind that you’ll have to adhere to a repayment period as set forth by your 401(k) administrator. In addition, the entire amount will be due immediately if you separate from your company for any reason.
• Down payment assistance: These programs differ state by state and municipality by municipality, but generally, down payment assistance involves grants, forgivable loans or low-interest second mortgages that can be put toward the down payment and closing costs, Naig told us.

Impact of personal loans on credit and mortgage approval

Using a personal loan for a down payment or instead of a mortgage can affect both your credit score and your mortgage approval chances.

Impact on your credit score

Taking out a personal loan can temporarily lower your credit score because of the hard inquiry on your credit. Also, taking out a large personal loan (like you’d need for a home) can affect your debt-to-income (DTI) ratio, which is one of the key aspects that mortgage underwriters focus on, said Naig.

“When you apply for a mortgage and right before that, you acquire a huge personal loan, it is essentially ringing the red alert. And even if they are paid off and never missed, it gives the impression of overextension and could hurt your borrowing power,” he said.

Impact on your mortgage approval

Your DTI ratio can rise above the acceptable level (usually between 41% and 45%) with a high monthly payment from an outstanding personal loan when you are trying to get your mortgage.

Naig said that “buyers who take out large personal loans to prep for the process can get a nasty surprise when their mortgage loan application is suddenly denied late in the process. If you are thinking of borrowing money, call your lender first to discuss it.”