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Should You Use Personal Loan Pay Mortgage Closing Costs?

Should you use a personal loan to pay for mortgage closing costs?

Michael Jensen
By , Mortgage and Finance Guru
Edited by Harry Jensen

Mortgage closing costs can run thousands of dollars depending on your lender, mortgage amount, loan program, location and other factors. If you have limited financial resources, paying for closing costs can be a significant obstacle to closing your mortgage.

If you are short on funds, one potential solution is to use a personal loan. While it is feasible to use a personal loan to pay for mortgage closing costs, there are several points to keep in mind. Plus, there are other options you should consider to help pay for closing costs instead of applying for a personal loan.

First, if you think you need a personal loan to pay for closing costs, you should apply for the loan several months before you apply for the mortgage. You never want to apply for a personal loan -- or any loan for that matter -- in between when you submit your mortgage application and when your mortgage closes.

Incurring significant new debt after you apply for a mortgage may cause your application to be declined, change your mortgage terms or reduce the loan amount you qualify for.

Applying for a personal loan may also cause your credit score to drop, at least temporarily. The lower your credit score, the higher your mortgage rate. If your score is too low, you may not qualify for certain mortgage programs.

If you apply for the personal loan well in advance of applying for the mortgage, you give your credit score several months to recover. This also enables the lender to factor the personal loan into your mortgage application.

It is also important to understand how the personal loan impacts what size mortgage you can afford. The monthly payment for the personal loan is included in your debt-to-income ratio when you apply for a mortgage. The higher your monthly debt expenses for personal, car and student loans as well as credit cards, the lower the mortgage amount you qualify for.

Use ourMORTGAGE QUALIFICATION CALCULATORto determine the mortgage you can afford

If the payment on the personal loan is too high, you may not be able to afford the mortgage you need to buy the home you want. If you have a high enough monthly gross income, then the personal loan payment may not be an issue but if you are on the border, the extra debt expense may prevent you from qualifying.

In short, make sure you understand how the personal loan affects the mortgage you can afford and if you decide to apply for the loan, do it as early as possible before you apply for the mortgage.

You should also consider alternative ways to pay for closing costs that do not require a personal loan. You may be able to use a gift, company program or closing cost assistance grant to pay for your closing costs without increasing your debt expense, reducing the mortgage you qualify for or your affecting your credit score.

You can use a gift from a friend or relative to pay for closing costs as long as you are not required to repay the money you receive. Additionally, some larger companies offer homebuyer assistance programs to help you pay for your closing costs or down payment.

You can also apply for a closing cost assistance assistance program with your state or local housing department or commission. These programs are usually structured as grants that you do not need to repay as long as you live in your home for a certain period of time, usually five years.

Review How Closing Cost Assistance Grants Work

Closing cost grants are typically provided by HUD-approved local housing departments in conjunction with participating lenders. Select your state from the HUD website below to learn about the programs available in your area.

HUD State Resources Website

Additionally, an increasing number of mortgage lenders are offering their own homebuyer assistance programs so we also recommend that you contact multiple lenders in the table below to learn about the programs they offer. Plus, shopping lenders is the best way to save money on your mortgage.

Current Mortgage Rates in Ashburn, Virginia as of July 19, 2024
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Rate data provided by Displayed by ICB, a division of Mortgage Research Center, NMLS #1907, Equal Housing Opportunity. Payments do not include taxes, insurance premiums or private mortgage insurance if applicable. Actual payments will be greater with taxes and insurance included. Read through our lender table disclaimer for more information on rates and product details.

Finally, if a personal loan, gift, company program or closing cost assistance grant does not work for you, there may be other solutions to reduce or help you pay for mortgage closing costs.

Review What To Do If You Can’t Afford Mortgage Closing Costs


"Down Payments & Closing Costs."  My Home by Freddie Mac.  Freddie Mac, 2019.  Web.

"B3-6-05, Monthly Debt Obligations."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, February 5 2020.  Web.

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About the author
Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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