5 Ways to Borrow Money for a Down Payment on a Home

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Updated on Tuesday, May 5, 2020

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It can be challenging to come up with thousands of dollars for a mortgage down payment. If you don’t have enough savings on hand or if you’re worried about cash flow, you may want to borrow money for a down payment.

Here are five down payment loan options, along with their pros and cons.

5 ways to borrow money for a down payment

1. Borrow from your 401(k)

You may be able to use funds from your 401(k) as a down payment loan. In many cases, there’s a 10% early withdrawal penalty for accessing money in your 401(k) plan before you reach age 59 ½, but there’s no penalty if the money is used to buy your primary home.

The Internal Revenue Service (IRS) rules allow you to borrow up to 50% of your vested account balance or $50,000, whichever is less. The repayment term for most 401(k) loans is five years, but there’s an exception if the loan was used to purchase your main home. If you default on your loan payments, though, the 10% penalty kicks in.

Pros

Cons

  • You have the opportunity to borrow from your own savings with a 401(k) loan, instead of from someone else.
  • You can avoid an early withdrawal penalty, because the loan is being used for a primary home purchase.
  • You must repay the loan in full by the next tax filing deadline if you leave your job before paying it off.
  • You’ll face a tax penalty if you default on your loan payments.

2. Borrow from your IRA

If you have an individual retirement account (IRA), you may find it a feasible option to use some of that money toward your down payment.

The IRS allows first-time homebuyers to withdraw up to $10,000 from an IRA to buy, build or rebuild their first home without incurring a 10% tax penalty. If you have a spouse who’s also a first-time buyer, they can withdraw an additional $10,000, also without a penalty. The money is subject to income taxes, however.

You don’t have to repay the money you borrow from an IRA since it’s a withdrawal and not a loan, but it’s wise to replace that money as soon as you can. It was originally earmarked for your retirement, after all.

Pros

Cons

  • You don’t have a loan to repay when withdrawing money from your IRA.
  • You avoid the additional 10% penalty as a first-time homebuyer.

  • You have to pay income taxes on the amount you withdraw.
  • You’re limited to withdrawing $10,000, which means you may have to find additional sources to cover the rest of your down payment.

3. Borrow from a friend or relative

Some major benefits of borrowing from a family member or friend are:

  • Potentially having a lower interest rate on your loan.
  • Having more flexibility with your repayment term.
  • Not having to go through the scrutiny of a bank or other lender.

Still, a loan from a loved one will count as debt, which affects your debt-to-income (DTI) ratio. Mortgage lenders prefer borrowers with a DTI ratio of 43% or lower, which means that a maximum of 43% of your gross monthly income should go to repaying all debt, including your hypothetical mortgage, according to the Consumer Financial Protection Bureau (CFPB).

Pros

Cons

  • You might be able to snag a low interest rate or a flexible repayment term.
  • You could get access to the money faster than working with a financial institution.

  • You’re putting your relationship at risk if you fail to repay the loan.
  • Mortgage lenders will factor the loan as debt into your home loan application.

4. Borrow from equity in an existing property

If you already own another home, you could tap your available equity to borrow money for a down payment. This could be through a home equity loan or home equity line of credit (HELOC).

A home equity loan is paid in a lump sum and typically has a fixed interest rate and repayment term. A HELOC is a revolving credit line that you can withdraw funds from as needed, until your repayment period starts. HELOCs often have variable interest rates, but you pay interest only on what you borrow.

Pros

Cons

  • You’ll get a lower interest rate for a home equity loan or HELOC than other types of loans.
  • You’ll avoid private mortgage insurance (PMI) if the amount you borrow is large enough to cover a 20% down payment.

  • Your home is used as collateral. If you stop making payments, you risk losing your home to foreclosure.
  • You lose the equity you’ve built in that property.

5. Borrow a piggyback loan

A piggyback loan is a second mortgage that acts as a down payment loan. You’d get a first mortgage for 80% of your home’s purchase price, a second mortgage for 10% of the price and make the remaining 10% down payment with your own money.

Pros

Cons

  • You avoid paying for PMI.
  • The interest you pay on a piggyback loan may be tax-deductible.

  • Piggyback loans usually have higher interest rates.
  • You’re repaying two mortgages at once.

Should you use a down payment loan?

Borrowing money to meet your required mortgage down payment can help you achieve your homeownership goal, but there are several considerations to weigh. For instance, any loan you borrow will be included in your DTI ratio calculations — something your mortgage lender cares about as much, if not more, than your credit score.

Additionally, you’re tacking on another monthly debt obligation. If you don’t already have the room in your budget to manage your mortgage payments and repay a new down payment loan, you risk stretching yourself too thin and could eventually fall behind on repaying the loans.

If you do decide to borrow money for your down payment, be sure it helps you qualify for a mortgage instead of counting against you.

Other ways to get a down payment for a house

If borrowing additional money on top of your home loan doesn’t seem like a financially sound decision, consider one of the following options to come up with your mortgage down payment.

  • Ask for a gift from loved ones. If you have a family member or friend who is generous enough to give you a monetary gift, those funds could go toward covering your down payment. Several mortgage programs, including conventional and Federal Housing Administration (FHA) loans, allow down payment gifts. You’ll need to provide a gift letter and other documentation to show who and where the money is coming from, and that it doesn’t need to be repaid later.
  • Apply for down payment assistance. Check with your state or local housing authority for available down payment assistance programs. You may also qualify for closing cost assistance. Look for assistance in the form of a grant or forgivable loan; otherwise, you may have to repay the money you receive.
  • Pick up a side hustle. Provided you can carve out dedicated time, consider getting a part-time job or other side gig — such as driving for a rideshare company or providing specialty freelance services — to earn extra income. Once you do, make it a point to stash away all or most of your earnings for your down payment.

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