Can You Get a Personal Loan to Buy a House?

It is technically possible to acquire a personal loan for a home purchase, but this approach is highly unconventional and impractical. Personal loans are not designed for the significant financial undertaking of buying a house. This method presents substantial limitations, making it unsuitable for most homebuyers. Standard home financing options are tailored to the unique financial demands of real estate transactions.

Understanding Personal Loans Versus Mortgages

Personal loans and mortgages are fundamentally different financial products. A personal loan provides a lump sum that a borrower repays in fixed monthly installments over a set period. These loans are usually unsecured, meaning they do not require collateral. Consequently, lenders face higher risk, leading to shorter repayment terms and higher interest rates.

The amounts available through personal loans are generally much smaller compared to the cost of purchasing real estate. While some lenders may offer personal loans up to $100,000, the average personal loan amount was around $18,287 in 2024. Repayment periods for personal loans are typically short, often ranging from two to seven years. Interest rates for personal loans can vary widely, but they are generally higher than mortgage rates, with averages ranging from about 12.57% to 26.51% as of mid-2025, and some rates reaching up to 36% or more, particularly for unsecured options.

In contrast, a mortgage is a secured loan specifically designed for real estate acquisition, where the purchased property itself serves as collateral. This security significantly reduces the risk for lenders, allowing them to offer much larger loan amounts, lower interest rates, and extended repayment terms. Mortgages commonly feature repayment periods of 15 to 30 years. The average home value in the United States currently ranges from approximately $368,000 to over $522,000.

Limitations of Personal Loans for Home Purchases

Financing a home purchase with a personal loan encounters practical constraints. Personal loan amounts are typically inadequate to cover the cost of an average home. While some personal loans can reach up to $100,000, the median home price in the United States often exceeds $400,000.

Beyond the insufficient principal, the combination of higher interest rates and shorter repayment terms inherent to personal loans leads to extremely high monthly payments. For instance, a personal loan with an average interest rate of 15% to 25% repaid over a few years would result in an exorbitant monthly payment, even for a fraction of a home’s value. Such payments would be considerably larger and less affordable than those associated with a traditional mortgage, which spreads costs over 15 to 30 years.

Securing a large personal loan significantly impacts a borrower’s debt-to-income (DTI) ratio. This ratio, calculated by dividing total monthly debt payments by gross monthly income, is a factor mortgage lenders assess to determine a borrower’s ability to manage additional debt. A large personal loan dramatically increases the DTI, often pushing it beyond the acceptable thresholds, which typically range from 36% to 43% for mortgage approval. A high DTI can severely hinder a borrower’s ability to qualify for any other significant credit.

Mortgage lenders also scrutinize the source of funds for a down payment. They generally require down payment funds to come from verifiable sources such as savings, investments, or gifts from approved relatives, rather than from another borrowed debt. Using a personal loan for a down payment is typically disallowed by mortgage lenders and would be considered a red flag, potentially jeopardizing approval for traditional home financing. This policy ensures that the borrower has a genuine financial stake in the property and is not overleveraged.

Conventional Home Financing Methods

Mortgages are the established and most common method for financing a home purchase, offering structures designed for this large, long-term investment. They provide favorable interest rates and extended repayment schedules. The most prevalent types include conventional, FHA, VA, and USDA loans, each catering to different borrower profiles.

Conventional loans are widely available and are not backed by a government entity. They generally require a minimum credit score and typically call for a down payment ranging from 3% to 20% of the home’s purchase price; a 20% down payment helps borrowers avoid private mortgage insurance (PMI). For instance, the median down payment for all homebuyers in 2024 was 18%, while first-time buyers put down a median of 9%. FHA loans, insured by the Federal Housing Administration, offer more lenient qualification criteria, including lower credit score requirements and down payments as low as 3.5%. These loans are popular with first-time homebuyers but require mortgage insurance premiums (MIP).

VA loans, guaranteed by the U.S. Department of Veterans Affairs, provide benefits for eligible service members, veterans, and their spouses, often allowing for 0% down payments and no private mortgage insurance. Similarly, USDA loans support homeownership in eligible rural areas, also frequently offering zero down payment options. Closing costs, which cover various fees associated with finalizing a home purchase, commonly range from 2% to 5% of the loan amount, averaging around $6,905 including taxes.

Beyond traditional mortgages, other less common but legitimate avenues exist for home acquisition. Cash purchases, where a buyer pays the full price upfront, eliminate the need for financing and associated interest. Another alternative is owner financing, also known as seller financing, where the seller directly lends the buyer the money for the purchase instead of a bank. This arrangement is often used when a buyer cannot qualify for a conventional mortgage or in transactions between parties who know each other. While owner financing can simplify the process by avoiding some bank fees and appraisals, it often involves higher interest rates and typically requires a significant balloon payment after a shorter term, such as five to ten years.