Often the hardest part of buying a house is making a down payment on the mortgage. Saving the large sum needed can take forever, and a logical question might be, why can't I borrow a personal loan to cover the down payment? Unfortunately, you are not allowed to do that.
Why Can't I Get a Loan for a Down Payment on a House?
Mortgage Institutions Against This
Under the rules set by the federally backed institutions Fannie Mae and Freddie Mac, mortgage providers are not allowed to accept a down payment from another loan.
It Is Difficult to Pay Debt With Debt
When you make a down payment, it shows that you have been able to save some money as part of the cost of a property and that you are financially responsible. If you use debt to pay another debt, it indicates that you may have trouble managing your finances.
It Increases Your Debt-to-Income Ratio
Your debt-to-income ratio is a major factor in a lender's decision to approve a mortgage. If you borrow to pay a deposit on the mortgage your overall debt will be higher and the lending institution may think the risk of default will be high.
You Can Not Sneak it By Your Mortgage Issuer
You cannot conceal the source of the down payment because the mortgage lender will see your credit report which shows any existing debts. Lenders will also require you to tell them where the down payment comes from, and some lenders will want the money to be shown in your bank account for some time before being used for a deposit.
You Would Have to Pay Back Two Expensive Loans
Even if you could use a personal loan as a down payment it would cause a lot of difficulties. You would have two large debts to service and you could easily default on one or both of the loans.
How Can I Make a Down Payment on a House?
The best way to make a down payment is to save money from your regular income until you have enough. You may already have some savings, or you can cash in your retirement fund and any investments. You can also get a lower deposit at a higher interest rate, although if the deposit is less than 20% you will need to take out mortgage insurance.