How To Borrow Money for a Down Payment

As home prices have increased, so has the amount needed for a down payment. To buy a home for the December 2023 median sales price of $413,200, you’d need $82,640 to make a down payment of 20%, and $41,320 for 10%.

If you don’t have enough money saved up to make a down payment, you may be able to borrow it.

“We tell homebuyers that there are several great ways to borrow money for a down payment on a house,” says Shannon Feick, co-owner and co-founder of ASAP Properties, a homebuying company in Cincinnati.

9 Ways To Borrow Money for a Down Payment

Here’s a look at nine ways you can borrow money for a down payment on a house, as well as the advantages and disadvantages of each option.

1. Home equity loans

If you already own a home, you can take out a home equity loan to get cash for the down payment on a new one. You’ll receive the money in one lump sum and repay it following an installment schedule. If you fail to repay the loan, the lender can foreclose on your home. If you’re using a home equity loan to buy a new home, you typically repay the loan when you sell your current home. Home equity loans usually have fixed interest rates, and require borrowers to pay closing costs.

2. HELOCs

Commonly known as a HELOC, a home equity line of credit is another way homeowners can use their equity to borrow money for a down payment on a new home. Unlike a home equity loan, homeowners can use a HELOC to borrow money as needed, up to the limit set by the amount of equity they are borrowing. HELOCs typically come with a variable interest rate.

3. 401(k) loans

Another option is to use your 401(k) retirement savings account.  A 401(k) loan lets you borrow up to 50% of your vested account balance, up to a maximum of $50,000, at interest rates that typically are about 1% to 2% above the prime market rate. You usually have up to five years to repay the loan, but that can be extended if you use the money to buy a primary residence. If you leave your job before the loan is repaid, you’ll need to repay it immediately or it will be considered a distribution. The loan won’t be taxed as income.

You also may withdraw cash from your 401(k), but it usually comes with penalties and tax liabilities. You typically have to pay a 10% early withdrawal penalty if you’re under the age of 59½ years old. There are exceptions for hardship withdrawals, including for homebuying expenses, but they apply only if you have no other assets to put toward the purchase. If you make a withdrawal, the amount you take out will count as taxable income.

4. IRA withdrawals

You can withdraw funds from a traditional, SIMPLE, or Roth individual retirement account to make a down payment. As with a 401(k), there is a 10% early withdrawal penalty, and you have to pay taxes on the amount you withdraw. There are some exceptions: A first-time homebuyer can withdraw $10,000 from their IRA without penalty to buy, build, or rebuild a home.

5. Down payment assistance loans

Many states, local governments, and nonprofit organizations offer down payment assistance programs that can be used with conventional mortgages and Federal Housing Administration loans. These programs are typically geared toward low- and moderate-income families, or people with public-service jobs such as teachers or firefighters. Some programs offer grants, while others offer low-interest loans, interest-only loans, or forgivable loans. Some programs offer second mortgages that can be used to reduce the amount of your primary loan.

6. Bridge loans

Bridge loans provide borrowers with funds during a transitional period, usually while waiting for permanent financing or for an asset to sell. Homebuyers may use a bridge loan to afford the down payment on a new home before they’ve listed or sold their current home. Bridge loans usually are due for repayment in six to 12 months, and usually charge higher interest rates. Repayment options vary, and can include monthly payments, deferred payments, interest-only payments, or some combination of those options. Many homeowners get bridge loans from their current mortgage lender, and typically need at least 20% equity to qualify.

7. Pledged asset mortgages

A pledged asset mortgage uses holdings such as stocks and bonds to secure financing for a home loan. Instead of making a down payment, the assets are pledged as collateral and the lender is granted a security interest in the assets until the loan is repaid. The owner keeps the assets and continues to receive dividends or earnings. This retains the income the assets generate and avoids the potential capital gains tax liability of selling the assets for cash. While PAMs are rare, they can be useful for homebuyers with a large investment portfolio.

8. Peer-to-peer loans

Peer-to-peer lending allows borrowers to take out a loan from an individual or company. This can be useful for borrowers with lower credit scores, as cutting a traditional lender out of the equation could give them access to lower interest rates or lenders more willing to take on risk. To take out a P2P loan, you’ll likely need to use an online lending platform that sets the rates and terms. While these platforms can protect your financial information as securely as a lender, you won’t know where the money you’re borrowing is coming from.

9. Gift money from family or friends

If you have family or friends who are in a financial position to give you money, then you can apply a cash gift to your down payment. However, you’ll need to provide a signed statement that confirms that money is not a loan. You’ll typically need such a letter for any cash gift that’s greater than half the value of your total monthly income. So, if you earn $5,000 per month, your lender likely will ask you to explain any gift of more than $2,500.

1 Way You Can’t Borrow Money for a Down Payment

You generally can’t take out a personal loan for a down payment on a home, and conventional loans and FHA loans explicitly prohibit the practice.

Taking out a personal loan increases your debt load, and your debt-to-income ratio. It also suggests to lenders that you don’t have the resources to afford the loan. If you don’t have enough cash on hand to afford a down payment, your lender may see you as too great of a risk to approve for a mortgage.

How Much Can You Borrow for a Down Payment?

There’s no limit on how much money you can borrow for your down payment aside from how much you can borrow. Keep in mind that borrowing money means you’re taking on debt that may affect your ability to get a mortgage. While making a larger down payment can help you get a lower interest rate and avoid PMI, you will have to make payments on what you borrow.

“The amount of money you can borrow for a down payment can vary based on the lender’s policies and your personal financial situation,” Feick says. “Things like credit history and income will have a huge impact on your ability to borrow. Most lenders allow a portion of the down payment to be borrowed, but buyers should be careful because a down payment loan may affect their ability to qualify for the actual mortgage.”

Alternatives To Borrowing Money for a Down Payment

If you’ve decided against borrowing money to make a down payment, that doesn’t mean you have to give up your homebuying ambitions. Here are some alternatives:

• “Piggyback” loan. A piggyback loan is a second mortgage you take out at the same time as your primary mortgage when you buy a home. This can reduce the size of your primary mortgage enough to avoid having to pay for PMI, but you’ll have a second mortgage payment to make each month.
• Seller financing. This option — also known as owner financing — is where the buyer pays the seller for the home in installments instead of taking out a mortgage from a third-party lender. This is rare, and may mean you’ll pay higher interest rates, and have fewer legal protections if there’s a dispute.

Hold off on buying. If you don’t want to borrow money for a down payment, you could postpone buying a home until you have enough saved up.

FAQ: How To Borrow Money For a Down Payment

Here are answers to common questions about borrowing money for a down payment.

The Bottom Line on How To Borrow Money for a Down Payment

Borrowing money for a down payment can help aspiring homeowners buy that first home. There are a variety of ways you can borrow money for a down payment, each of which has its own pros and cons. Regardless of which method you choose, you’ll be increasing your total debt load and the amount you owe each month. It’s important to fully understand the terms when borrowing money for your down payment, as well as how that loan affects your ability to afford a mortgage.