How to Get a Loan on Your Down Payment for a Home

Considering whether to borrow money for a down payment on a new home? You have options, which include taking out a home equity loan or home equity line of credit (HELOC), or even asking a friend or relative for a private loan.

Below, you’ll learn the pros and cons of the various ways you can borrow money for your down payment, so you make the right decision for your financial needs.

Buying a home is likely the biggest purchase you’ll ever make. Saving up enough for a down payment can be challenging for many buyers. If you need some help getting over the down payment hurdle you may be able to get a loan. Let’s explore what loans you can use for a down payment and how they work.

What is a Down Payment?

A down payment is the amount of money you pay upfront when purchasing a home, typically 3% to 20% of the purchase price. With a mortgage, the down payment lowers the amount you need to borrow.

For example if you buy a $300,000 home and make a 10% down payment that’s $30,000. You would then need to finance the remaining $270,000 with a mortgage.

Down payments benefit buyers by:

Lowering your monthly mortgage payments
Potentially getting better mortgage rates
Avoiding private mortgage insurance (PMI)
Improving chances of approval

While 20% down is ideal, many buyers don’t have that much in savings The median down payment for first-time buyers is around 6% of the purchase price

Down Payment Loan Options

If you’re short on down payment funds, a down payment loan can help cover the gap. Let’s look at two common types of down payment loans.

FHA Loans

Federal Housing Administration (FHA) loans only require 3.5% down for qualified buyers. They’re popular with first-time buyers.

With an FHA loan:

You can use gift funds for your entire down payment.
Minimum FICO scores are just 580.
Debt-to-income ratios up to 57% are allowed.

The catch is you’ll pay an upfront mortgage insurance premium and ongoing monthly mortgage insurance with an FHA loan. This adds to your total costs.

Piggyback Loans

Also called 80-10-10 loans, piggyback loans let you avoid private mortgage insurance (PMI) without a full 20% down.

Piggyback loans work like this:

You get a first mortgage for 80% of the home’s value.
You get a second mortgage, or piggyback loan, for 10% of the value.
Your down payment is 10%.

Because your first mortgage is under 80%, you avoid PMI. Piggyback loans can offer lower rates than FHA loans, but minimum credit scores are higher, around 700.

Down Payment Assistance Programs

Beyond down payment loans, many local and state programs offer down payment grants and loans. Eligibility varies, but programs are worth checking out if you’re close to having enough saved.

Down payment assistance programs typically have income limits and may be limited to:

First-time homebuyers
Certain home types
Veterans
Teachers, police, firefighters
Rural buyers
Minorities

Some popular down payment assistance options include:

HomeReady Mortgage: Fannie Mae program with income limits that can be used with 3% down payment programs.

Home Possible Mortgage: Freddie Mac program that allows 3% down with flexible credit and income requirements.

USDA Rural Loans: 100% financing for low-income buyers in rural areas.

VA Loans: Zero down payment loans for veterans and service members.

FHLBank: Down payment and closing cost grants offered through local lenders and nonprofits.

Tips for Getting a Down Payment Loan

If you want to get a loan for your down payment, keep these tips in mind:

Shop multiple lenders. Compare interest rates and fees to find the best deal. Online lenders like Rocket Mortgage offer a fast and easy way to see personalized rates.
Check credit scores. Most down payment loans require scores of at least 600 to 700. Review your credit reports for errors and pay down balances to boost your scores.
Lower debt. Lenders look at your total debt burden, including credit card balances and auto, student and personal loans. Pay off high-interest debts and consolidate bills to improve your debt-to-income ratio.
Save for closing costs. Down payment loans cover your down payment, not closing costs. Save around 2-5% of purchase price for closing.
Choose loan terms wisely. Opt for the shortest term possible so you pay less interest. But make sure payments fit your budget.
Understand the risks. With two loans, your monthly payments and risk of default increase. Make sure it’s affordable before taking on two mortgages.

Alternatives to Down Payment Loans

If you don’t want to take on more debt, here are some options for funding your down payment instead:

Tapping your retirement account – You can withdraw Roth IRA contributions tax-free. Other accounts allow up to $10,000 for first-time homebuyers.
Borrowing from friends and family – Be sure to document gifts properly and understand tax implications.
Trying seller financing – The seller carries part of the mortgage at a negotiated rate.
Using home equity – If you currently own a home, you may be able to cash-out refinance or take a home equity loan or line of credit.
Liquidating investments – Cashing out stocks, bonds or mutual funds. Be aware of taxes and early withdrawal penalties.
Saving aggressively – Make budget cuts, reduce expenses, or take on a side gig to ramp up savings.

The Bottom Line

A down payment loan can help you buy sooner if you’ve fallen short on your down payment savings. But make sure you understand the costs, loan terms, and risks involved before committing. Shop multiple lenders to find the most affordable option that fits your budget and goals.

Get a loan from a friend of family member

Asking a friend or family member for a down payment loan is another option. Lenders will only accept a private mortgage secured by an asset, which means you’ll need to put up your home, car or another valuable — like artwork — as collateral for the loan.

Plan to document the following if you choose this borrowing path:

The loan terms, including the loan amount, interest rate, repayment term and monthly payment
A written statement from the friend or relative confirming they don’t have an interest in the home you’re buying
Proof you’ve received the funds from them
Proof you own the asset securing the loan

If your friend or family member is willing to gift you money, they’ll need to sign a gift letter confirming no repayment is expected. Be sure to keep a paper trail of all of the funds going from their account to yours.

5 ways to borrow money for a down payment

If you haven’t quite saved up enough to make a large down payment to buy a new home, you may want to choose from one of these five options. Just be sure to first check your budget to determine whether an extra monthly payment would put a strain on your finances.

100% LOAN / 0% DOWN PAYMENT USING AN FHA LOAN 2024

FAQ

Can you borrow money for a down payment?

In some cases, you can borrow money to make a down payment. However, you should carefully consider that option since borrowing your down payment would increase your overall debt and your monthly payments.

How do I get a loan on a house that is paid for?

You’d likely do a cash-out refinance, which typically has a relatively lower interest rate compared to other types of loans. You can do the same now, even though you’ve paid off your mortgage. You’ll simply take out a new mortgage and pocket the equity in the form of cash at closing.

How much is a down payment on a loan?

It would be a good idea to make a down payment of 15%-20% of the cost of an expensive asset such as a house when availing a home loan. You may repay the remaining loan amount over time through EMIs or equated monthly instalments.

How much is a down payment on a mortgage?

Down payments can range between 3 percent and 20 percent of the purchase price, depending on the type of mortgage used. Some loan programs don’t require a down payment at all. Making a larger down payment upfront reduces your monthly mortgage payments and saves you money on interest in the long run.

Do you need a down payment for a home loan?

Some loan programs don’t require a down payment at all. Making a larger down payment upfront reduces your monthly mortgage payments and saves you money on interest in the long run. Most homebuyers getting a mortgage have to pay a portion of the property’s purchase price upfront.

How do you use a down payment to buy a house?

To use it: Input your minimum down payment. This is the lowest amount of money you’re able to put toward your home purchase. If you’re getting a conventional mortgage loan, for example, your down payment might be as little as 3 percent of the home’s price. Input your maximum down payment.

How do you write a down payment for a home loan?

If you’re getting a conventional mortgage loan, for example, your down payment might be as little as 3 percent of the home’s price. Input your maximum down payment. This is the highest amount of money you’re willing and able to put toward your home purchase. Input the home’s purchase price. Input the loan term in months.