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Can you finance closing costs?

Although you can finance closing costs with a personal loan, it's not always the best strategy. In this article, Credit Union of Southern California (CU SoCal) explains how to decide what you should do if you need help with closing costs.

Personal Loan for Closing Costs

With mortgage interest rates as low as they are, it may not make good financial sense to use a personal loan to finance closing costs.
Some personal loans will come with an interest rate higher than a mortgage interest rate, so you will be adding to the overall cost of purchasing a home and adding an additional monthly payment to your expenses.
While personal loans are handy for unexpected and emergency expenses, most homebuyers can benefit from saving up the money for closing costs well in advance of purchasing a home.
For over 60 years, CU SoCal has provided quick pre-approvals, no application or funding fees, and other great benefits for our valued Members.
Call CU SoCal at 866.287.6225 to schedule a no-obligation loan consultation, or apply online today!

Get Started on Your Personal Loan!

What are Closing Costs?

Mortgage closing costs are the fees that a homebuyer will pay when closing on a new home purchase. They are paid “at the closing table,” and must be available to complete the purchase transaction.
Closing costs may include: a mortgage application fee charged by the lender, appraisal fee, attorney fee, recording fees, property tax, homeowner’s insurance, a closing fee or escrow fee paid to the title company that performs the closing and other services, and other fees.
According to, closing costs typically total 2% to 7% of a home’s purchase price. So on a $250,000 home, you can expect the amount to run anywhere from $5,000 to $17,500.

What are Personal Loans?

Personal loans, also called “consumer loans,” are loans offered to individuals by credit unions, banks, and online lenders.
Personal loans can be secured or unsecured. An unsecured loan is offered by a lender based on the applicant’s creditworthiness (not collateral or security). No collateral is needed in order to get an unsecured personal loan. A secured loan requires the borrower to pledge an asset such as property, the balance of a deposit account, or a car to “secure” the loan.
If the borrower does not pay the loan in full, the lender can takes possession of the asset that was used as collateral. A mortgage loan and a vehicle loan are both examples of secured loans.
Different lenders generally will offer the same types of personal loans; however, the interest rates, minimum and maximum amounts, and repayment terms will vary.

What Can Personal Loans Be Used For?

Personal loans can be used for a variety of purposes, but are typically used for large expenditures, such as making home repairs, starting a business, paying medical bills, consolidating higher-interest debt, or paying for a wedding or funeral.
What to Look for When Using a Personal Loan to Cover Closing Costs
Interest Rate: This may be stating the obvious, but when shopping for any loan, start by looking for the lowest rate that you can qualify for. In the case of trying to obtain a personal loan to pay for closing costs, do the numbers to make sure you can afford to make a personal loan payment and a mortgage loan payment each month.

Loan Amount: This is the amount of the loan you are seeking. Personal loans typically come with a maximum limit.

Repayment Terms: This includes the duration or number of years during which the loan must or can be paid-off, of the loan as well as the conditions relating to loan repayment.

Pre-payment Penalty: This is a fee charged by some lenders when a loan is paid-off before the payment period has ended. The best personal loan to look for is one with no pre-payment penalty, so you can pay it off at any time.

Unsecured or Secured Loan: As we mentioned earlier, personal loans can be secured (requiring collateral or security) or unsecured (not requiring collateral).

Advantages of Using a Personal Loan for Closing Costs:

No Collateral: If you choose an unsecured loan, no collateral is needed.

Quick to Obtain: Approval is usually based on credit score.

Flexible Repayment Terms: Some lenders have more flexible repayment terms than others, such as no pre-payment penalty. Before you sign for any loan, be sure to compare the terms you get from different lenders and ask questions if there’s something you don’t quite understand.

Disadvantages of Using a Personal Loan to Cover Closing Costs

While applying for and obtaining a personal loan is generally an easy process, doing so in order to cover closing costs on a new mortgage may not be a good idea for several reasons:

  1. Some lenders may not approve a borrower for a mortgage if they have recently taken out a personal loan, as it shows you may not be in a strong financial position to take on other new debt.
  2. A personal loan could make it difficult to get approved for a mortgage. All lenders have mortgage loan guidelines that state the required maximum Debt-to-Income ratio (DTI). This ratio is a comparison between how much debt you owe and how much you earn in income. The added debt of a personal loan (in addition to other loans and debt you may have) means you will likely have a high DTI. A high DTI could prevent you from being approved for a mortgage or it could result in a higher mortgage interest rate.
  3. Affordability. Personal loans typically come with a high interest rate. Before taking out a personal loan add up your monthly income and expenses plus projected expenses on owning the home you want to purchase. Are you financially able to make on-time monthly personal loan payments in addition to mortgage payments?

Should You Use a Personal Loan to Cover Closing Costs?

Using a personal loan to cover closing costs may not be a good idea, unless you have the income to cover monthly loan payments and mortgage payments.
If you already have an existing personal loan or line of credit established at the time you apply for a mortgage, then using the funds already available to you can certainly work in your favor.
If you don’t have an existing personal loan, it’s better to simply start saving money and creating a new budget that will let you save the money you need for the closing costs on a new home.
If you do decide to finance your closing costs, contact your lender and apply for the loan after you have already been preapproved for a mortgage.

Getting the preapproval first is unlikely to jeopardize your ability to get approved for a mortgage loan, as the debt-to-income ratio for the pre-approval will have already been calculated.

CU SoCal Personal Loans

CU SoCal is helping Southern Californians get the funds they need to pay for life’s necessities. Our personal loan features include:

  • Financing from $500 to $30,000.
  • Terms up to 120 months for the lowest possible monthly payment.
  • Line of credit option for access to funds when you need it.
  • No application fee.
  • No prepayment penalty.
  • No funding fee.

Want to know more? Visit our Personal Loans page for additional details.

Why Savvy Consumers Choose CU SoCal

For over 60 years CU SoCal has been providing financial services, including car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with a personal loan representative.

Get Started on Your Personal Loan!

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Credit Union of Southern California (CU SoCal) is a leading financial institution empowering those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County to reach their goals and build strong financial futures. CU SoCal provides access to convenient money management services and offers competitive rates and flexible terms on auto loans, mortgages, and VISA credit cards—turning wishing and waiting into achieving and doing.


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