If you’re planning to buy a home but don’t have enough cash saved for the down payment, you may be wondering: Can you borrow money for a down payment?
The short answer is: sometimes.
Mortgage lenders generally need to verify where the money you’re using to purchase a home comes from. Your down payment, closing costs and required cash reserves typically need to come from an acceptable, documented source. Simply borrowing money from a friend, taking out an undisclosed personal loan or using an unverified source of funds can create problems with your mortgage approval.
However, there are circumstances where borrowed funds from an allowable source may be permitted, depending on the mortgage program and your individual situation.
For example, certain retirement accounts may allow you to borrow against your balance. In some circumstances, borrowers may also be able to obtain funds using an allowable asset as collateral.
The important thing is to talk with your mortgage lender before moving money or taking out a loan for your down payment. Your lender needs to know where your funds are coming from and determine whether that source is acceptable under the guidelines for your mortgage.
Why Do Mortgage Lenders Care Where Your Down Payment Comes From?
When you apply for a mortgage, the lender isn’t simply looking at whether you have enough money in your bank account.
The lender generally needs to verify:
- Where your down payment money came from
- That you have access to the funds
- That the funds are from an acceptable source
- Whether the money is borrowed
- Whether you have to repay the borrowed funds
- Whether the repayment creates an additional monthly debt
- Whether you have enough money available for closing costs
- Whether you have the required cash reserves
This process is commonly referred to as sourcing and documenting your funds.
For that reason, you shouldn’t assume you can borrow money for your down payment and simply transfer it into your checking account without telling your lender.
Large or unexplained deposits can require additional documentation and may delay the mortgage process.
Can You Use a 401(k) Loan for a Down Payment?
In some circumstances, yes.
Many employer-sponsored retirement plans, including some 401(k) plans, allow participants to borrow against their retirement account balance.
The specific rules depend on your plan. If your plan allows a loan, you’ll need to provide your mortgage lender with documentation showing the terms of the retirement account loan and the amount available to borrow.
Your lender will also want to understand whether the loan requires repayment and how those payments affect your ability to qualify for the mortgage.
For example, if you’re required to make monthly payments on the 401(k) loan, those payments may need to be considered when evaluating your overall debt obligations.
However, the exact treatment of a retirement-account loan depends on the mortgage program and applicable underwriting guidelines.
Always discuss the 401(k) loan with your mortgage professional before using it as a source of down payment funds.
Can You Borrow Against Other Assets to Buy a House?
Potentially.
Some borrowers have valuable assets that can be used as collateral for a loan. Depending on the mortgage program and lender requirements, certain borrowed funds secured by an allowable asset may be acceptable.
An asset may need to have a verifiable value and may require documentation or an independent appraisal.
Examples can potentially include certain:
- Automobiles
- Investment assets
- Artwork
- Collectibles
- Coins
- Other valuable personal property
The important distinction is that not every valuable item automatically qualifies as an acceptable source of borrowed funds.
Your lender will determine whether the asset and loan arrangement meet the requirements for your particular mortgage.
Can You Use a Car Loan for a Down Payment?
This is an area where buyers should be especially careful.
An automobile may have significant value, but that doesn’t necessarily mean you can simply borrow against it and use the proceeds toward your home purchase.
If you are considering using a vehicle or another personal asset as collateral, discuss the arrangement with your lender before taking out the loan.
The lender will need to determine whether the loan is an acceptable source of funds and how the new debt affects your mortgage qualification.
What About Borrowing Money From Family or Friends?
This is another situation where the answer depends on the circumstances and the mortgage program.
Buyers sometimes assume that they can simply borrow money from a parent, relative or friend and use it toward their down payment.
That isn’t something you should do without first talking to your mortgage lender.
In some situations, gift funds from an eligible donor may be permitted. A gift is different from a loan because the money is not expected to be repaid.
If the money is actually a loan, however, the lender will need to know that it is borrowed money and determine how it must be treated for underwriting purposes.
Never misrepresent a loan as a gift.
If you’re receiving money from a family member for your home purchase, let your lender know before the funds are transferred so they can explain the appropriate documentation and requirements.
Does Borrowing Money for a Down Payment Affect Your Debt-to-Income Ratio?
It can.
Your debt-to-income ratio (DTI) compares your monthly debt obligations with your qualifying income. Mortgage lenders use DTI, along with other financial information, to help determine whether you can afford the mortgage.
If borrowing money for your down payment creates a required monthly payment, that payment may need to be included in your debt obligations.
For example, suppose you take out a loan to obtain $20,000 for your down payment. If that loan requires monthly payments, those payments could affect the amount of mortgage debt you qualify to carry.
This is one reason it’s important to talk with your lender before taking out additional debt.
What About Credit Cards or Personal Loans?
Using a credit card cash advance or an unsecured personal loan to come up with a down payment can create complications.
Not only does the lender need to determine whether the funds are an acceptable source, but any resulting debt or required payments may affect your mortgage qualification.
There can also be additional costs associated with borrowing the money.
If you’re short on funds for your down payment, don’t automatically turn to a credit card or personal loan. Talk with your lender first and find out what options may be available to you.
Can You Use Gift Money for a Down Payment?
In some mortgage programs, gift funds may be allowed from an eligible donor.
Gift funds are different from borrowed money because the donor does not expect the money to be repaid.
The lender may require documentation confirming:
- Who provided the gift
- The amount of the gift
- That the funds are actually a gift
- Where the funds came from
- That the donor meets the program’s requirements
The rules can vary based on the type of mortgage and the relationship between the donor and borrower.
If a family member wants to help you purchase a home, talk with your loan officer before accepting or transferring the money.
Can You Use Retirement Funds Without Borrowing?
Depending on the account and your circumstances, retirement funds may sometimes be available as a source of money for a home purchase.
However, withdrawing retirement funds can have tax and financial consequences.
A withdrawal is also very different from a retirement-account loan. The rules, repayment requirements and potential tax implications can vary significantly.
Before taking money from a retirement account to purchase a home, consider talking with both your mortgage professional and your financial or tax advisor.
What About Down Payment Assistance Programs?
If your primary concern is not having enough money saved for a down payment, down payment assistance programs may be worth investigating.
Some programs can provide assistance toward a buyer’s down payment or closing costs. Eligibility requirements vary and can depend on factors such as income, location, purchase price, credit and the specific mortgage program.
Programs can also change over time.
If you’re buying a home in Illinois, ask your mortgage professional whether there are currently available down payment assistance programs for which you may qualify.
How Much Money Do You Actually Need to Buy a House?
Remember that your down payment isn’t necessarily the only money you’ll need to purchase a home.
Buyers may also need funds for:
- Closing costs
- Prepaid property taxes
- Homeowners insurance
- Mortgage-related expenses
- Home inspections
- Earnest money
- Moving expenses
- Initial repairs or improvements
- Required cash reserves
For example, a buyer purchasing a $400,000 home with a 5% down payment would need $20,000 for the down payment alone.
That doesn’t necessarily mean $20,000 is the total amount of cash the buyer needs to complete the transaction.
Understanding your total cash-to-close is much more important than simply knowing the down payment percentage.
What Should You Do If You Don’t Have Enough Saved for a Down Payment?
If you’re ready to buy a home but don’t have enough money saved, don’t assume that borrowing is your only option.
Depending on your situation, you may want to explore:
- A lower down payment mortgage program
- Down payment assistance
- Eligible gift funds
- Retirement account options
- Selling or liquidating an allowable asset
- Adjusting your target purchase price
- Continuing to save before purchasing
Your mortgage professional can help you understand which financing options may be available, while your real estate agent can help you determine what purchase price makes sense for your goals.
Can You Borrow Your Down Payment? The Bottom Line
So, can you borrow money for a down payment?
The answer isn’t simply yes or no.
Mortgage lenders generally require your down payment and other funds needed to close to come from an acceptable and verifiable source. However, certain borrowed funds may be permitted depending on the mortgage program, the source of the money and the lender’s underwriting requirements.
You may potentially be able to use funds from a retirement-account loan, an allowable asset-backed loan or another approved source. Gift funds and down payment assistance may also provide alternatives for qualified buyers.
The most important rule is simple:
Talk to your mortgage lender before borrowing or moving money that you intend to use for your home purchase.
Your lender can tell you whether the source is acceptable, what documentation is required and whether any resulting debt could affect your ability to qualify.
Frequently Asked Questions About Borrowing a Down Payment
Can I take out a personal loan for a down payment?
It depends on the mortgage program and lender. A personal loan creates additional debt and may not be an acceptable source of down payment funds. Always discuss it with your lender first.
Can I borrow from my 401(k) for a down payment?
Some 401(k) plans allow participants to borrow against their account. Whether the resulting funds can be used for your home purchase and how the loan is treated for qualification depends on the applicable mortgage guidelines and lender.
Can my parents give me money for a down payment?
Gift funds from an eligible donor may be permitted under certain mortgage programs. Your lender will typically require documentation showing that the money is a genuine gift and does not need to be repaid.
Can I use a credit card for my down payment?
You should not assume credit-card funds are an acceptable source for your down payment. Talk with your mortgage lender before using credit or a cash advance to fund your home purchase.
Does a down payment loan affect my mortgage approval?
It can. If the borrowed money creates a monthly payment, that payment may affect your debt-to-income ratio and mortgage qualification.
Can I use an asset as collateral for my down payment?
Potentially. Certain loans secured by allowable assets may be acceptable, but the asset, loan and documentation must meet applicable mortgage requirements.
Can I buy a home without a down payment?
Some qualified buyers may be eligible for mortgage programs that allow 0% down, including certain VA and USDA loans. Eligibility and property requirements apply.
What if I don’t have enough money saved for closing?
Talk with your lender before taking out additional debt. You may have other options, including a different loan program, eligible gift funds or down payment assistance.
Buying a Home in the Chicago Suburbs?
If you’re considering buying a home in DuPage County or the surrounding Chicago suburbs, understanding your financing options before you start shopping can make the process much easier.
Whether you’re a first-time buyer, moving up to a larger home or relocating to the area, knowing how much cash you’ll need to purchase a home—and where those funds can come from—is an important part of preparing for your purchase.
Our team can help you understand the home-buying process, determine what to consider when establishing your price range, and connect you with trusted mortgage professionals who can answer specific questions about financing and down payment options.
Ready to start exploring your options? Let’s talk about your next move.
This article is intended for general educational purposes only and should not be considered financial, tax or mortgage advice. Mortgage requirements, loan programs, down payment requirements and underwriting guidelines can vary by lender and may change over time. Consult with a qualified mortgage professional and financial advisor regarding your individual circumstances.
