How To Borrow Money for a Down Payment

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Published March 29, 2023
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Making the down payment is one of the biggest barriers to buying a home. If your savings aren’t piling up as quickly as you’d like, you may wonder whether you can borrow the money for a down payment.

The answer is yes, but this approach has advantages and disadvantages. Here’s how you can borrow money to make a down payment on a home.

Can You Borrow Money for a Down Payment?

Yes, there are several different ways that you can borrow money to cover your down payment. However, you’ll want to carefully weigh the trade-offs, as this path often involves increasing your overall debt and monthly payments, and some types of loans won’t allow you to use borrowed money for a down payment.

It’s best to understand the rules and restrictions on borrowing for a down payment before deciding to do so.

How Much Can You Borrow for a Down Payment?

There aren’t always limits to how much you can borrow for a down payment. However, you’ll need to determine how much of a down payment you need and how much debt you’re willing to take on. A larger down payment can help you get a lower interest rate and avoid paying for private mortgage insurance, but taking on a second loan means having to make payments on that debt.

Loan Options for a Down Payment

There are several options for borrowing money for a down payment. Here’s a rundown of what they are as well as the benefits and drawbacks of each option.

Money from friends or family

If you have family or friends who are in a financial position to help you with a down payment, then they can give you money for that purpose. However, to apply the money to a down payment, it must be a gift and not a loan. You’ll need to present a signed statement that confirms the funds are not to be repaid.

Pros and Cons of Using Money From Family or Friends for a Down Payment

ProsCons
You’ll get cash or equity to help cover your down payment.You’ll need a signed letter verifying that it’s a gift.
You’ll become a homeowner sooner.It could get weird.
You don’t have to pay it back.

Personal loan

Personal loans can be an effective way to consolidate debt. However, few lenders allow you to use personal loans to fund a down payment on a home. Conforming conventional loans and Federal Housing Administration loans do not allow it.

Pros and Cons of Using a Personal Loan for a Down Payment

ProsCons
You’ll get enough money to cover your down payment.Cannot be used on conforming conventional loans or FHA loans.
You’ll become a homeowner sooner.You’d be taking on additional debt.
You might not get approved due to your increased debt-to-income ratio.
Personal loans come with high interest rates.

Bridge loan

A bridge loan is a short-term loan that typically lasts six months to one year. The good news is it can help you come up with a down payment — but you’ll need to pay it back quickly. These loans are typically used by people selling their home who need temporary funding for a down payment on their next home before closing on the home they are selling.

Pros and Cons of Using a Bridge Loan for a Down Payment

ProsCons
You’ll get enough money to cover your down payment.Bridge loans have higher interest rates.
You’ll become a homeowner sooner.You may need 20% home equity in your current home to get a bridge loan to help buy a new one.
You may not have to make payments for the first few months.You’ll need to pay closing costs.

Home equity loan

If you already own a home, a home equity loan is one option for coming up with cash for a down payment on a second home or on a new home if you plan to move. A home equity loan lets you borrow your equity as a lump sum with a fixed interest rate and predictable monthly payments. The downside is that it reduces your equity, so if you sell your current home to buy a new one, the home equity loan will come out of your profit when it sells.

Pros and Cons of Using a Home Equity Loan for a Down Payment

ProsCons
You can use equity you’ve already built to help cover your down payment.You’ll need to pay interest.
You can buy a new home sooner.You’re reducing your equity in your current home.
Comes with a fixed interest rate.Your home serves as collateral.
You’ll have to pay closing costs and fees.

HELOC

A home equity line of credit is similar to a home equity loan, but instead of receiving the cash as a lump sum, you get a line of credit with an adjustable interest rate that you can draw on as needed. If you have sufficient equity, a HELOC can help you make a down payment on a second home or on a new home if you plan to move.

Pros and Cons of Using a HELOC for a Down Payment

ProsCons
You can use your equity to help cover your down payment.You’ll need to pay interest.
You can buy a new home sooner.You’re trading in your equity and reducing the amount you’re left with.
You can use the line of credit for other things during the draw period.Your interest rate can fluctuate.
You only pay interest on what you draw.Your home serves as collateral.
There may be fees and a prepayment penalty.

When Does It Make Sense To Borrow Money for a Down Payment?

Borrowing money to make a down payment can help you become a homeowner sooner, but it also comes with some pretty considerable drawbacks.

“Borrowing money for a down payment can be a risky strategy, as it can increase the homebuyer’s debt load and potentially lead to financial stress,” says Nathan Claire, a Realtor and founder of Buying Jax Homes in Jacksonville, Florida.

According to Claire, in some cases, it can make sense to borrow money for a down payment so long as the homebuyer:

  • Has a stable income and can afford additional debt payments.
  • Can obtain a favorable interest rate on the additional loan.

Alternatives to borrowing money for a down payment

Even if you decide you don’t want to borrow money for a down payment, that doesn’t mean you can’t become a homeowner sooner. Here are some other options:

  • Piggyback loan. A piggyback loan is a second mortgage that can help you make a large enough down payment that you can avoid paying for mortgage insurance. However, you’ll still have to pay additional closing costs.
  • Owner financing. With this option, the seller becomes the lender. You’ll be able to close faster and for cheaper, but you’ll likely be paying a lot more interest.
  • Down payment assistance programs. State and local governments have down payment assistance programs offering funding that — if eligible — you may not need to repay.

FAQ

Here are the answers to some frequently asked questions about borrowing money for a down payment.

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