Personal loans aren’t usually the kind of loan you get when buying a house. However, it’s possible in certain situations where it might be more cost-effective to take out this loan instead of a mortgage. Read on to know whether you can buy a house using a personal loan in Memphis, TN and whether it’s a wise financial decision.
Why Buy a House with Personal Loan
Deciding on whether you should get a personal loan to purchase a house should depend on the property you’re looking to buy. For instance, purchasing a single-family home with this loan type is not the wisest decision. That’s because personal loans usually have a much shorter repayment term and higher interest rates.
On the other hand, a personal loan is a good choice if you’re buying a small home or a mobile home since the cost is much lower. In addition, you might find it challenging to find a traditional mortgage lender who’s willing to finance a mobile home or a tiny house.
Some lenders also offer personal loans for when borrowers want to purchase a small home. However, be informed that it will be considered a cash offer if you choose this option. That means you cannot use the home as loan collateral. Still, the seller might favor you more since the sale isn’t contingent on a mortgage.
Using Personal Loan for a Down Payment
If you’re getting a traditional mortgage to purchase a standard-sized home, down payment requirements can range from three to 20 percent. That may also depend on your financial situation and the lender’s offer.
While getting a personal loan to cover this amount is tempting, your lender is unlikely to accept it. That is because a personal loan increases your debt-to-income ratio, hurting your chances of getting approved.
Moreover, it shows the lender that you do not know how to manage your money well, adding to the list of reasons why they won’t approve you. Personal loans are usually only taken for personal reasons like consolidating debt, emergency medical expenses, financing a considerable cost, starting a business, and home remodeling.
How a Personal Loan Affects Debt-to-Credit Ratio
While taking out a personal loan to purchase a mobile home or a small house can be a wise option, you need to consider how it will affect your credit score. Generally, any type of credit knocks a few points off your credit score once a lender runs a hard inquiry into your credit report.
The most significant impact on your credit score is your monthly payments. If you pay your bill on time every month, your credit score will improve. However, if you miss or make late payments, you can wreck your credit.
To ensure that you stay on track with monthly payments, you can set up an automatic payment plan. Some lenders also offer interest rate discounts for borrowers who do this. You can also just set up monthly alerts that remind you to make payments before they’re due.
Whether you’re getting a traditional mortgage loan or a personal loan to fund your home purchase, ensure that you have a good credit standing to qualify for favorable loan terms. Always check your credit score before getting any loan so you can improve on some areas before sending an application.
At Magnolia Finance Co., we understand the time-sensitive need for financial help. We strive to make same-day loans ranging from $202.75 to $1785.50 with clear, straightforward repayment plans. Whether you are looking to build or rebuild credit, consolidate a few bills, or are simply caught in a bind, we try to make the borrowing process quick and straightforward. If you need a personal loan in Memphis, TN, call us today at 901-381-9095.