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