If you’re looking to buy a house for yourself, you typically opt for a mortgage loan to help you with the payment.
Personal loans are not typically used to pay for a house.
However, there can definitely be certain circumstances where it’s not only possible but it may even be a better option for you than a mortgage loan.
Today, I’ll be discussing whether you can take a personal loan to buy a house and as well as some tips which you should definitely be aware of.
Is it a Good Idea to take a Personal Loan to Buy a House?
In most cases, it’s not a wise decision to take out a personal loan in order to buy a house.
This is because personal or short-term loans typically have much shorter repayment terms/plans and they typically charge a much higher interest rate than mortgage loans.
If you’re looking to buy a big or even a standard-sized family home, then a mortgage loan will most likely be your best bet.
However, if you’re looking to buy a tiny house or apartment for yourself, or even a mobile home, then you may want to look into the possibility of a short-term loan rather than a mortgage loan.
In fact, you may even find that you’ll have trouble finding a lender who’s going to give you a mortgage loan to buy a tiny apartment or a mobile home.
In cases such as these, borrowing money using a personal loan may definitely be a prudent solution.
One thing you must keep in mind in this case is that a personal loan is not necessarily a secured loan like a mortgage is.
For a mortgage loan, the house itself is put up as collateral for the loan. This means that if you default on your debt, then the lender has the right to seize your house.
However, personal loans can be either secured or unsecured. If it’s an unsecured loan, then it will most likely have a much higher interest rate.
Secured loans typically have lower interest rates. So, if you want to get a secured personal loan, then you will typically have to offer up an initial cash deposit as your collateral.
Can I Use a Personal Loan for the Initial Deposit/Down Payment on My Mortgage?
When you’re buying a standard house using a traditional mortgage loan, then your initial payment can typically range from anywhere between 3% to 20% depending on your financial situation as well as the lender.
In theory, you can get a personal loan to pay for the initial deposit. However, in real life, you may find that this is quite difficult to do.
This is because your mortgage lender may not allow this.
When mortgage lenders are assessing whether or not to approve your mortgage loan, they calculate something known as your Debt-to-Income (DTI) ratio.
This is a comparison of how much debt you have compared to how much you earn. Your DTI ratio needs to be below a certain threshold for your mortgage application to be approved.
As you can probably tell, taking out a personal loan for the down payment will result in your DTI ratio increasing by a significant amount.
This might cause the mortgage lender to reject your application even if they had initially approved it.
Not to mention that taking out a loan to make your down payment also comes off as a red flag for lenders. Your mortgage lender will feel that you can’t manage your money properly and they will be apprehensive about approving your loan.
What are Bridging Loans?
If you’re already a homeowner and are looking to sell your current house to buy a new one, you may want to look into bridging loans.
|A bridging loan is a short-term loan that you can use to fund the purchase of new property for yourself. If you’ve sold your current house but don’t have enough money to buy a new one, then this loan is used to “bridge the gap” so you can buy the new property for yourself.|
Unlike conventional mortgages, these types of loans are fairly short term.
Thus, if you’re not a first-time buyer and are looking to sell your old house to buy a new one, then this is definitely a prudent solution that you can look towards.
As you can probably imagine, bridging loans do not offer as high an amount of money as a mortgage would.
Another thing to think about when considering bridging loans is the fact that they have quite high interest rates. It’s common for bridging loans to have interest rates as high as 18%.
Can I Use a Bridging Loan for the Down Payment on My Mortgage?
As I mentioned earlier, the down payment on your mortgage can be anywhere between 3% to 20% of the value of the property.
Hence, it does make sense to use a bridging loan to pay for the initial deposit on your mortgage.
However, the same issues apply to this option as they would to a typical personal loan.
Keep in mind that a bridging loan is just like any other personal loan and your mortgage lender would not act favourably towards your decision to make the down payment by taking out a bridging loan.
This can only work if you can prove with certainty to the mortgage lender that you will be able to pay back the debt incurred by the bridging loan within a short amount of time such as six months or a year. That too while keeping up with your mortgage repayments at the same time.
What Kind of Impact do Personal Loans have on My Credit Score?
Personal loans pretty much have the same type of impact on your credit score as any other type of debt would such as credit card debt, etc.
By this, I mean that it will only start negatively impacting your credit score once you start missing payments or if you pay them late.
As long as you are punctual with your debt repayments and pay them in full, your credit rating will remain healthy.
The mention of any loans you take out stays within your credit file for six years after the date on which you took out the loan.
What are Some Problems I could Face if I Take out a Personal Loan or Loans to Pay for My House or Property?
The problem with taking out several short-term loans or even a single one is that debtors can soon find themselves drowning in debt with no real way of paying it off.
There can be many reasons for this such as an increasing interest rate or the debtor getting fired from their job, etc.
While it’s true that lenders are required to assess debtors thoroughly before approving them for loans, the real responsibility to pay back debts still lands on the debtors.
If you fail to make payments towards your debt, you will default on your loans and as a result, you will start incurring even further charges.
These could be in the form of late payment fees or even debt collector costs.
Not only will your debt keep on building but you’ll start being contacted and harassed by debt collectors that your lender may hire to collect money from you.
This is because short-term loans are typically unsecured loans and lenders don’t have any sort of asset they could seize from you if you default on your loan. Thus, the only choice they have is to pursue you and ask you to make payments towards your debt to them.
If you fail to make payments towards your short-term loan(s), then your lender could take out a County Court Judgment (CCJ) against you.
Failing to make payments towards your CCJ can have much more dire consequences than failing to make payments towards your lender.
The court could order to send bailiffs to your home who will then seize your belongings and sell them off in order to make up for the debt you were unable to repay.
All of these factors are something you should definitely keep in mind and ponder over when you’re considering different options of borrowing money to buy your house.
Check Your Credit Rating
Before applying for any type of loan, be it a mortgage or a short-term one, it’s a good idea to check your credit rating to see if you’re even eligible for it or not.
Typical loans that have a lower interest rate are only offered to individuals with good credit scores.
You can still find lenders that offer loans to people with bad credit but you’ll definitely have to look a little harder and they typically have higher interest rates.
If you’re worried about not being accepted for a loan because of your credit rating and you have time, you could spend a few months improving it before applying for the loan.
This is something that a lot of individuals do in order to improve their chances.
You can improve your credit rating simply by making your credit repayments on time. A good way to do this is by getting a low-interest or 0% interest credit card.
Be sure to keep yourself in check and only use that credit card for essentials and household expenditures such as fuel, groceries, utilities, etc.
At the end of each month, always back the outstanding balance on time and in full.
Consistently paying back the outstanding balance on your credit card each month will cause your credit rating to improve and after some months, you could apply for your loan without fear of being rejected.
Taking out a personal loan to buy a house can most certainly be a slippery slope.
It’s important to address all financial factors to make sure whether it would be the best option for you or not.
While it’s not something that’s recommended in most cases, there definitely are some situations in which it could be the better option.