Can You Get a Loan for a Down Payment?

Coming up with a down payment is one of the most challenging parts of buying a home. The typical homebuyer puts down 15% at the closing table, according to the National Association of Realtors (NAR), which often translates to tens of thousands out of pocket. For a $350,000 home, that’s a $52,500 down payment.

But can you get a loan for a down payment if you don’t have the cash? The answer is yes, and your options include tapping your existing home equity, borrowing from your retirement savings or asking a relative or friend for a private loan.

6 ways to borrow money for a down payment

If you haven’t saved up enough to make a down payment on a new home, consider choosing from one of the six borrowing options below. But first, check your budget to ensure that an extra monthly payment wouldn’t put a strain on your finances.

1. HELOC or home equity loan
2. Loan from a relative or friend
3. Retirement savings
4. Bridge loan
5. Down payment assistance
6. Personal loan

1. Take out a HELOC or home equity loan

If you currently own a home, you can convert your equity into cash with a home equity line of credit (HELOC) or home equity loan and use the funds to buy a new home. This may come in handy if you find a great deal on a new home, but you haven’t sold your current home and need cash to make a larger down payment.

HELOC

A HELOC is a revolving credit line that works like a credit card. When you use a HELOC for a down payment, you can:

• Use as much (or as little) of the credit line as you need during the draw period, which usually lasts 10 years
• Pay down the balance to zero and charge it again during the draw period
• Pay interest only on your outstanding balance

Browse current HELOC rates.

Home equity loan

With a home equity loan, you’ll receive the entire loan balance in a lump sum and make monthly installment payments based on your interest rate and chosen repayment term. Most home equity loan terms are five to 30 years.

Learn more about how much you could borrow using a home equity loan calculator.

2. Get a loan from a family member or friend

Asking a relative or friend for a down payment loan is another option. Lenders will typically only accept a private loan secured by an asset, which means you’ll need to put up your home, car or another kind of valuable (such as artwork) as collateral for the loan.

If you intend to borrow from a friend or family member, be sure to document the following items to share with your mortgage lender:

→ The loan terms, including the loan amount, interest rate, repayment term and monthly payment

→ A written statement from the friend or relative confirming they don’t have an interest in the home you’re buying

→ Proof you’ve received the funds from them

→ Proof you own the asset securing the loan

If your friend or family member is willing to gift you money, they’ll need to sign a gift letter confirming they don’t expect you to repay it. Be sure to keep a paper trail of all of the funds going from their account to yours.

3. Tap your retirement savings

Your retirement savings should never be used to bankroll big-ticket purchases. However, if your path to the golden years includes homeownership, you may want to use some of your savings to buy a house.

If you have a 401(k), you may be able to take out a 401(k) loan for your down payment. You repay the loan over time, and you can typically borrow up to 50% of your vested account balance or $50,000 (whichever is less), according to the IRS. However, if you were to leave your job for any reason, you may have to pay back the outstanding balance in a short amount of time. Your financial planner or accountant can help you determine if taking a 401(k) loan or distribution is right for your situation.

4. Get a bridge loan

A bridge loan is a short-term mortgage that allows you to borrow from the equity in your current home to use toward a new home purchase. Bridge loans come in handy if you’re in a competitive housing market where sellers won’t accept an offer conditional on the sale of your current home.

There are two different types of bridge loans: a first-mortgage bridge loan and a second-mortgage bridge loan.

→ First-mortgage bridge loan. This option requires a large loan for more than you currently owe, usually up to 80% of your current home’s value. You’ll pay off your outstanding loan balance and use the extra cash as a down payment on the house you’re buying.

→ Second-mortgage bridge loan. Similar to a home equity loan or HELOC, you’ll borrow a portion of the equity in your existing home to cover the down payment on your new home. This type of loan doesn’t replace your current home loan, making it a second mortgage.

5. Explore down payment assistance programs

Check with your state or local housing agency to find out if you qualify for a down payment assistance program. Assistance may include grants, loans or tax credits that help cover some or all of your down payment. To qualify, you’ll need to meet your chosen program’s mortgage requirements, which may include a minimum credit score and income limits. In addition, some programs will require you to live in the home for a set time period to avoid paying back the assistance.

Some government-backed mortgage programs, including VA loans and USDA loans, offer no-down-payment loans to eligible homebuyers.

6. Consider a personal loan

A personal loan is a type of installment loan that’s typically unsecured and has a fixed interest rate and monthly payment. Lenders provide you with a lump sum of cash that you repay over a set term.

While some lenders may allow you to use a personal loan for a down payment on a house, it’s generally not recommended since it increases your debt-to-income (DTI) ratio. Many mortgage lenders don’t view this approach favorably, and it may hurt your ability to qualify for a loan.

If you think you’ll need to borrow a personal loan to cover your down payment, it may make sense to postpone buying until you’ve had an opportunity to save for a house. Trimming expenses and setting money aside each month can go a long way. You can also focus on improving your credit score during this time to help you qualify for lower rates.

Don’t know your credit score? Get your free score on LendingTree Spring today.

Pros and cons of borrowing money for a down payment

When should you borrow money for a down payment?

If you have to borrow money for a down payment, it may be a sign that you can’t afford the home you’re considering. However, financing a down payment may make sense in the following situations:

→ You’ve accepted an offer for your current home’s purchase, but it won’t close before you buy your new home.

→ You have plenty of extra assets to pay off the down payment loan if needed.

→ You have ample room in your budget to afford the extra monthly payments.

→ You’re not getting ready to retire (in the case of a 401(k) loan).