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Saving for a down payment can be one of the biggest challenges for first-time homebuyers. While it may be tempting to use a personal loan for a down payment on a house, it won't fly with most mortgage lenders. That's because a new loan will increase your total debt load and could signal that you aren't financially ready to buy a home. If money is tight, there may be alternative options that can help you become a homeowner.
Why Can't I Use a Personal Loan as a Down Payment?
A personal loan is a flexible, unsecured loan that could come in handy if you're looking to consolidate debt or cover an unexpected bill. But when buying a home, using a personal loan for a down payment is generally prohibited for the following reasons:
- It will increase your debt-to-income ratio (DTI). Your DTI shows lenders how much of your gross monthly income is going toward debt. Most mortgage lenders like this number to be below 43%. If you take out a new personal loan, you'll also assume a new monthly payment—which means that your DTI will increase. That could affect your borrowing power or prevent you from getting approved altogether.
- It could suggest you're a risky borrower. Having to borrow money to cover some or all of your down payment may be a red flag that you're not in the best financial position to buy a home. All large deposits—including funds that come from a personal loan—will need to be substantiated.
Lenders want reassurance that your financial health is strong and that you can afford your new loan payment. To that end, conforming loans and government-backed mortgages do not allow borrowers to use a personal loan as a down payment.
How Will Getting a Personal Loan Affect My Credit?
In general, it's wise to hold off on applying for new loans and credit during the mortgage application process. Taking out a personal loan before applying for a mortgage can affect your credit—even if you don't plan on using it for a down payment. Here's how:
- It will trigger a hard credit inquiry, which can temporarily reduce your credit score by a few points.
- A new personal loan will increase your debt load. The total amount you owe across all your debts is an important factor in your FICO® Score☉ Θ.
- You'll take on a new loan payment, which could stretch your budget and make mortgage lenders hesitant to work with you.
In some cases, securing a personal loan could actually help your credit. For example, if you use these funds to consolidate revolving debt, you'll reduce your credit utilization rate. This represents the total amount of available credit you're currently using—which can affect roughly 20% to 30% of your credit score, depending on the scoring model.
Alternatives to Using a Personal Loan as a Down Payment
If you don't have your down payment saved up just yet, you may still have options for buying a home. Consider the following personal loan alternatives.
Hold Off Until You Can Save More
Making moves to increase your savings could be all it takes to get approved for a mortgage. Here are some simple tips to help you get there:
- Reduce your expenses. Finding ways to save money can free up extra cash to put toward your down payment. That might involve canceling unused subscriptions, negotiating your bills or shopping around for new car insurance.
- Automate your savings. Once you've determined how much you can realistically save each month, set up automatic transfers to your savings account. You can also have a portion of your paycheck directly deposited into your down payment fund.
- Put cash windfalls toward your down payment. This can include tax refunds, work bonuses or any other financial windfall.
- Find ways to increase your income. That may inspire you to pick up a side gig, sell unwanted things online or negotiate a raise or bonus.
Explore Loans That Require a Lower Down Payment
The median down payment for a first-time homebuyer is 10%, according to the most recent data from the National Association of Realtors (NAR). But it's possible to get a home loan with much less. Some conventional loans allow for down payments as low as 3%.
Federally backed mortgages are also worth exploring. FHA loans, which are geared toward first-time buyers and insured by the Federal Housing Administration, approve eligible borrowers with as little as 3.5% down. USDA loans backed by the U.S. Department of Agriculture are designed for certain rural and suburban homebuyers and require no down payment at all. The same goes for VA loans, insured by the Department of Veterans Affairs, which are for U.S. service members, veterans and eligible family members.
Consider Down Payment Assistance Programs
Borrowers can also look into down payment assistance programs to help ease the financial burden of buying a home. Assistance programs can include:
- Grants: These are financial gifts that do not have to be repaid. Many grants are designed specifically for first-time homebuyers. The National Homebuyers Fund, for example, provides grants to low- and moderate-income buyers that could be equivalent to a 5% down payment.
- Lender programs: Some mortgage lenders offer down payment assistance programs. This could translate to a credit or grant to put toward your down payment.
- Fannie Mae's HomeReady Mortgage: Designed for creditworthy low-income buyers, these loans require a 3% down payment and more flexible funding options. For example, there is no minimum personal contribution for your down payment.
- State and local programs: For example, your county may offer 0% interest loans that can be used to cover your down payment and closing costs. The U.S. Department of Housing and Urban Development (HUD) allows you to search local homebuying programs by state.
Borrow Money From a Friend or Family Member
If you know someone who's in a position to lend you money for a down payment—and you feel comfortable asking—it could be a viable alternative to a personal loan. When borrowing money from friends or family, it's wise to come up with a repayment plan, create a loan agreement and make good on your payments. This can allow for a smooth experience and prevent strain on the relationship.
Remember that most mortgage lenders will want to substantiate any large deposits in your bank account. If the money is a loan, you'll need to disclose that to the lender as it will factor into your debt-to-income ratio. If the money is a gift that does not need to be repaid, your lender will most likely require a gift letter.
Frequently Asked Questions
How Much Is a Down Payment on a House?
It depends largely on the mortgage type. In some cases, the down payment requirement could be as low as 3%. But if you have less-than-perfect credit, you may be required to make a larger down payment. Either way, the more money you pay upfront, the less you'll have to borrow. That can help you secure a more affordable monthly payment.
What Is the Best Way to Save for a Down Payment?
Planning ahead for your down payment is an important part of saving for a house. First, estimate how much you'll need. As of March 2026, the median home sale price in the U.S. was $408,800 according to NAR. Do some research on average home prices in your area. From there, you can set a savings target and automate your contributions. Keeping your down payment fund in a high-yield savings account can help your money grow faster.
Can I Use a Personal Loan for Closing Costs?
Closing costs generally amount to 2% to 5% of the home's sale price, which can be a significant expense. Whether you can use a personal loan to cover closing costs will depend on the lender. Even if they do allow it, the loan will be factored into your total debt and could affect your eligibility and interest rate. Keep in mind that some lenders have closing cost assistance programs for qualified borrowers.
The Bottom Line
You typically cannot use a personal loan for a down payment on a house, but there are ways to make saving a little easier. Down payment assistance programs can go a long way for eligible borrowers. Taking time to build your savings can also make you a more attractive loan applicant.
Your credit health is another important factor when applying for a mortgage. To see how you're doing, you can get your credit report and FICO® Score for free from Experian.