Can You Use A Personal Loan To Buy A House?

The Big Picture On Using A Personal Loan To Buy A House:

• • Personal loans and credit cards can supplement real estate financing but have limitations, including low limits and high interest rates.
  • Strategies include using cards for renovation materials, maximizing cash reserves pre-purchase, and leveraging multiple cards for increased funding.
  • Best suited for short-term needs such as bridge loans or renovation costs, not long-term property financing

(This is the fourth article in our series focusing on Unconventional Financing. Haven’t read the others? Start with Part 1 of the series on using using retirement accounts for real estate investing.)

Ever fantasize about the reward points you could earn if you bought a house with a credit card?

It’s not quite as crazy as it sounds. I did it, once.

Personal loans and low-APR credit cards are useful tools in your financing toolkit. While they have many shortcomings, they can be an excellent source for bridge or shortfall financing: a supplement to a larger financing plan.

The Effects of Personal Loans on Your Credit Score

Opting for a personal loan can impact your credit score positively and negatively. For example, applying for a loan typically results in a hard inquiry on your credit report, which may cause a decline in your score.

However, this negative effect is usually short-lived, as on-time payments can help improve your creditworthiness as you repay the loan – given that you’re really paying without delays. Also, punctual payments can translate to creditors’ financial responsibility and improve your score. On the contrary, missing payments or defaults can damage your credit for years – a nightmare for investors in the West.

Many lenders offer incentives such as interest rate discounts if you set up automatic payments, which also helps protect your credit standing. Moreover, adding a personal loan to your credit mix can positively influence your score, especially if you previously had limited types of credit accounts.

Risks and Limitations of Personal Loans In Home Buying 

There’s a big problem in using personal loans to buy a house: credit cards and personal loans tend to have low loan limits. Unless you’re buying a frighteningly low-end property, you probably won’t be able to finance the entire purchase with a credit card or personal loan.

Most personal loans are between $5,000 and $45,000, with the high end of that spectrum uncommon. Credit cards for middle-income earners usually have similar limits.

Personal loans and credit cards are also expensive compared to conventional mortgages. The interest rate on personal loans over $20,000 will almost always be double-digit and sometimes over 20%. ” Normal” credit card interest rates run 18-24%.

Feel the burn yet?

And none of that covers loan fees. Credit cards typically charge 3-4 points for cash advances, while personal loans generally charge similar fees. (A “point” in loan context is an up-front fee of 1% of the loan amount.)

Moreover, lenders amortize personal loans over a shorter period (2-5 years) than mortgages (15-30 years), which means higher monthly payments.

Lastly, credit card companies make no long-term guarantees that they’ll keep you as a client. They could call you tomorrow and say, “We’re canceling your credit card account. Please pay your balance immediately.”

So What Are They Good For?

Actually, credit cards and personal loans have some pretty persuasive advantages. The first? Quick turnaround.

Some lenders will fund personal loans as quickly as a few business days after your initial application. And credit cards are instantaneous – poof! You have funding. That’s impressive compared to 30-60 days for a conventional mortgage. This speed can be particularly appealing when using personal loans to buy a house in a competitive market.

Another advantage is that personal loans and credit card debts are unsecured: there is no lien against your property. If you suffered a complete financial apocalypse and couldn’t repay your loans, the lenders can’t foreclose on your property or take your firstborn child.

More Benefits of Credit Cards and Personal Loans

For a much better overview, below are some additional benefits you can expect from both CCs and personal loans. 

Also, you might’ve already considered the reward points on your credit card. When reward multipliers kick in, these can be quite juicy, sometimes up to 2, 3, or even 5%. 

Granted, there’s no “point” in chasing rewards if you must pay a 3-4% cash advance fee. But what if you don’t take a cash advance? Let’s talk strategy.

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A Few Creative Strategies

Credit cards are particularly useful for renovation projects. You can put the cost of materials directly on your credit card as a normal purchase. There is no cash advance fee, just reward points.

Many contractors pad their estimates and quotes for materials to earn more and err on the side of caution. Pay less for contracting and handyman work by only paying for labor and covering materials yourself. Word to the wise: ask for a normal quote first, then go back to the contractor and tell them you’ll handle the materials yourself. This way they won’t inflate their labor quote.

Want to get more aggressive? In the months leading up to your real estate investment, start putting every bill and every cost on your credit card. Pay only the minimum payment on it, and stockpile your cash. Of course, you’ll need the discipline to stay within your normal budget despite putting everything on plastic. You can pay for almost every expense in your life with credit cards, with the only major exceptions being your mortgage/rent and your car payment.

However, how do credit cards and personal loans fit into a broader financing plan?

If you’re buying a low-end home for $20,000 and putting another $10,000 in it before flipping or leasing it, no sweat. Congratulations, you’ve dodged mortgage lender fees.

And who says you can only use one credit card? If you have four credit cards, each with a $30,000 limit, that’s $120,000 in available financing. It’s expensive, non-guaranteed, and risky financing, but $120,000 in instant financing nonetheless.

More often, though, credit cards and personal loans merely serve a supportive role. Perhaps you could use another source of financing to buy the property, but weren’t able to finance the renovations? Or maybe they are your backup options in case your project goes over budget.

Short-Term Funding Raises the Stakes on Your Exit Strategy

Personal loans and credit cards can be great for bridge or shortfall funding, but they are short-term solutions. Both types of financing are simply too expensive to hold for more than six months.

As outlined above, they’re particularly useful for renovation projects. Once the renovations are finished, you can execute your exit strategy, which should involve selling or refinancing to pay off your short-term debts.

And make no mistake, you do need a thorough exit strategy. Real estate investors should always have both a primary exit strategy and at least one contingency plan, and they should be detailed. If you’re selling, who’s your real estate agent? How quickly can they move the property? Who’s the target buyer: a fellow investor, a first-time homebuyer, or a retiree?

If you’re keeping the property as a rental, how are you leasing it? Will it be a vacation rental, a long-term rental, or a student rental? Who’s your target renter? How long will it sit vacant before you can expect to secure a good tenant? What’s the minimum amount you’re sure you can rent it for?

And if Plan A fails, what else can you do?

As important as exit strategies are normally, they’re critical when using high-cost, short-term debt. You need to move quickly to pay it off, else you risk your entire profits on the deal spilling over to interest payments.

Different Avenues for Home-Buying Funds

Since we’re at it, let’s include different ways (or loans) to buy a house. 

USDA Loans

USDA loans are government-backed mortgages for homebuyers looking to settle in countryside areas. The standout feature of USDA loans is that they typically have zero down payment requirements – a good choice for investors looking to maximize their earnings potential in rural communities.

Mortgage Loans

When financing a home, traditional mortgage loans are the go-to for most Americans – mortgage lenders are designed to support homeownership. You’ll encounter fixed-rate mortgages, which maintain a steady interest rate, and adjustable-rate options, where the rate may fluctuate over time. However, you must be prepared to put down a deposit — typically starting at 5% of the property’s value.

Bridge Loans

The transition between selling your home and purchasing a new one can be tricky. That’s where bridge loans come in. To be precise, these short-term financing solutions provide the necessary funds to “bridge the gap” during the interim period. They come in really handy when timing is important, and you need to secure your new home before finalizing the sale of your existing property.

Government-Backed Loans

For those facing credit challenges, government-backed loans can be the silver lining. FHA loans, backed by the Federal Housing Administration, offer more lenient credit requirements. 

Veterans and active-duty military personnel also have an even better deal with VA loans. VA loans often require no down payment to honor their service with better homeownership opportunities.

Rent-to-Own Agreements

You may also consider rent-to-own agreements as a trial run for homeownership. This arrangement lets you rent a property with the option to purchase it. It’s arguably the safest approach for those who aren’t quite ready to buy but want to work towards ownership. 

Sometimes, a portion of your rent may be allocated towards a future down payment to ease your path to purchasing the home.

Legalities Around Using Personal Loans To Buy A House

The legalities vary depending on your location and lender restrictions. But let’s discuss the most significant ones.

• • Unsecured nature – Personal loans are typically unsecured debts, meaning they’re not tied to specific assets like a house. This lack of collateral makes lenders wary, as it doesn’t provide them with the usual protections and legal claims associated with mortgage lending.
  • Lender restrictions – Some banks are like, “Nope, don’t even think about using our personal loan cash for your mortgage down payment.” But if you’re going all-in and buying the place outright? They might just look the other way.
  • Terms and conditions – Reading the whole thing can be tedious. But you have to look for clauses that might restrict the use of funds for property purchases or impose penalties for such use. It can help you avoid legal complications down the line.
  • Collateral differences – Mortgages can tell you something like, “If you can’t pay, we’ll take the house.” Personal loans can’t do that, so banks get a little picky about it.
  • Intended use – Personal loans are meant to fix your car or pay off credit cards. Using them to buy a house is like using a screwdriver to hammer a nail. It might work, but it’s not ideal unless you’re using it for renovations.
  • Potential applications – Say you find an awesome low-end property that’s a total steal, but getting a mortgage would take forever. A personal loan might be a viable option, but this should be approached with full awareness of the legal implications.

Remember, using personal loans and credit cards for real estate investing may be playing with fire, but fire is an awfully handy tool when used properly.♦

Ever used a credit card for financing a real estate investment? What about personal loans? How’d it work out for you? We love horror stories as much as love stories…