Can You Use a Loan for Your Down Payment?


Can You Use a Loan for a Down Payment on a House?

The short answer is no. Conventional and government-backed home loans do not allow for the down payment to come from a loan of any kind.

Lenders want the down payment funds to come directly from the borrower and not have to be repaid.

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Can I use a Personal Loan for a Down Payment?

Lenders do not allow borrowers to use a loan for the down payment on a mortgage. Lenders will check your credit and inquiries to ensure you haven’t gotten any loans that are not yet appearing on your credit history.

Any loans you do have are factored into your debt-to-income ratio (DTI ratio), which needs to be no higher than 41%.

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Piggyback Loans

A piggyback loan is a mortgage loan where a separate loan is used for a portion of the down payment. The most common piggyback loan is an 80-10-10, where the mortgage is for 80% of the loan-to-value ratio, a separate loan of 10% LTV, and a down payment of 10% of the purchase price is used.

The loan for 10% is a separate loan from the mortgage, and you will have two separate payments. This type of loan is typically only for larger loan amounts, such as jumbo loans.

Other Ways to Come up with Your Down Payment

While you can’t use a loan for a down payment on a house, here are some other ways you can come up with your down payment.

Gift Funds

Some mortgages, like FHA loans, allow for the down payment to be a gift from a friend or family member.

100 percent of the 3.5% down payment required for FHA loans may be gifted. If you have your down payment gifted to you, you’ll need a gift letter stating it’s a gift that does not need to be paid back.

401(k) or IRA

Lenders allow you to access the funds in your IRA or 401k to come up with your down payment. However, the Government charges a 10% penalty tax for withdrawing from retirement accounts before the age of 60.

If you’re borrowing money from one of your investment accounts, you will have to repay what you borrow. These payments are factored into your debt-to-income ratio and can affect how much of a home you’re approved for.

Down Payment Assistance Programs

There are many down payment assistance programs and grants out there, especially for first-time homebuyers. You can check your local county or city government website for available programs.

Grants and down payment assistance programs are free money that does not need to be repaid. There are also state-wide programs you can find on the HUD website.

Credit Card Cash Advance

While borrowing money using your credit card is not recommended, this method will work. However, you will be stuck with a high-interest rate, and the monthly payment will be included in your debt-to-income ratio.

Using a cash advance on a credit card is only a good idea if you have a large sum of money coming in a few months; otherwise, it is best to save up for your down payment.

Low and No Down Payment Programs

Just because you don’t have 20% to put down on a house doesn’t mean you can’t get a mortgage. Gone are the days of needing such a large down payment to be able to buy a house.

The Government came along in 1934 and started the Federal Housing Administration to help more Americans become homeowners by insuring mortgages to reduce the risk to the lender.

Down Payment Required by Loan Type

FHA Loan

3.5% - 10%

USDA Loan

No down payment

VA Loan

No down payment

203k Loan

3.5%

Conventional Loan

5% - 20%

Conventional 97 Loan

3%

HomeReady Loan

3%

Home Possible Loan

3%

Piggyback Loan

10%

Jumbo Loan

10% - 20%

FHA Loans

FHA loans are one of the more popular mortgage types used today. They are great for first-time homebuyers because of their low credit score and down payment requirements. Some lenders offer these loans to borrowers with a 580 credit score with just a 3.5% down payment.

The down payment for an FHA mortgage can come from gift funds or through the use of a down payment assistance program or grant. The 3.5% down payment is one of the lowest for any mortgage loan.

VA Loans

VA loans are one of the greatest benefits offered to our Nations’ Veterans. If you qualify for a VA loan, then no down payment is required. Veterans can receive 100% financing on their mortgage through the VA.

Mortgage insurance is required on all mortgages with a down payment of less than 20%. However, VA loans do not have a mortgage insurance premium; this can add up to thousands of dollars in savings per year.

USDA Loans

The U.S. Department of Agriculture created USDA rural development home loans to help farmers save money on their mortgage and encourage homeownership in rural areas. Not only do USDA loans offer 100% financing for homebuyers, but they also have the lowest mortgage insurance rate of any mortgage at just 0.35% of the loan amount.

203k Renovation Loans

FHA 203k loans are a type of home improvement loan that allows you to purchase a home in need of repairs plus get extra cash to renovate the home. 203k loans are a type of FHA loan. They have the same qualifying requirements as FHA loans and the same low 3.5% down payment.

Conventional 97 Loans

Fannie Mae wanted to compete with the FHA for first-time home buyers. The conventional 97 mortgage requires just a 3% down payment, which is even less than an FHA loan. And like FHA loans, you can use gift funds from a relative or friend. Like all conventional loans, the requirements are higher than Government loans; mortgage lenders typically require a 620 or higher FICO score.

Upfront Costs Besides the Down Payment

  • Closing costsClosing costs are fees charged by mortgage lenders for processing and funding mortgage loans. On average, you can expect to pay between 2%-5% of the loan amount.
  • Home Appraisal – The home appraisal is what lenders use to determine the market value of the property.
  • Discount points – Discount points are pre-paid interest that will lower the interest rate you pay towards the loan.