Where you can borrow for a down payment
You can borrow down payment money from a personal loan, a home equity line of credit (HELOC) if you own property, a 401(k) loan if your plan allows it, a family member, or a credit card—though each has different costs and risks. Some lenders will lend specifically for down payments; others treat it as any other personal loan. The cheapest option is usually a family loan with no interest. The fastest is often a credit card or personal loan that funds within days. The most expensive is a credit card cash advance or payday loan.
Before you borrow, check whether your mortgage lender will allow it. Most conventional mortgages permit down payment gifts from family but restrict or ban borrowed money, because a loan increases your debt-to-income ratio and signals higher financial risk. FHA loans have different rules—they allow gifts but not loans. VA loans typically do not allow borrowed down payments. Ask your mortgage lender before you commit to borrowing.
Key Takeaways
- Most mortgage lenders will not approve a loan if your down payment came from borrowed money, because it increases your debt-to-income ratio and makes you look riskier.
- A personal loan or HELOC typically costs 6 to 12 percent annually, while a credit card cash advance or payday loan can cost 20 to 400 percent and should be avoided.
- A 401(k) loan lets you borrow your own money at a low rate, but you must repay it or face taxes and penalties if you leave your job.
- A family loan with a written agreement is the cheapest option and often the only one a mortgage lender will accept without counting it against your debt.
- You must disclose all borrowed money to your mortgage lender; hiding a loan can kill your deal or result in fraud charges.
Personal loans and how they affect your mortgage approval
A personal loan is unsecured debt—the lender has no claim on your house or car, only on your income. Interest rates typically range from 6 to 36 percent depending on your credit score, income, and the lender. The loan shows up on your credit report immediately, and the monthly payment counts toward your debt-to-income ratio (DTI).
Your DTI is the total of all your monthly debt payments divided by your gross monthly income. Most mortgage lenders want your DTI below 43 percent. If you borrow $30,000 for a down payment at 10 percent interest over five years, your monthly payment is roughly $636. If your gross income is $5,000 per month, that loan payment alone uses 12.7 percent of your DTI budget. Add a car payment, credit cards, and student loans, and you may exceed the lender's limit.
Some lenders will reject you outright if they see a new personal loan on your credit report. Others will run the numbers and approve you if your DTI still fits. The safest approach: get a mortgage pre-approval before you borrow, then ask the lender in writing whether a personal loan for a down payment would disqualify you. If it would, explore other options.
Borrowing from your 401(k)
If your employer's 401(k) plan allows loans, you can borrow up to 50 percent of your vested balance, with a maximum of $50,000. The interest rate is typically the prime rate plus 1 or 2 percent—currently around 9 to 10 percent. You repay the loan through payroll deductions, usually over five years, and the money stays in your account earning returns.
The catch: if you leave your job, you typically must repay the loan within 60 days or face taxes and a 10 percent penalty on the unpaid balance. If you are 59½ or older, the penalty does not apply, but you still owe income tax on any unpaid amount. A 401(k) loan also reduces the money available for retirement growth, which costs you compound interest over decades.
Most mortgage lenders do not count a 401(k) loan as debt against your DTI, because they see it as borrowing from yourself. This makes it one of the few borrowed-money options that will not hurt your mortgage approval. However, some lenders will ask whether you have an outstanding 401(k) loan and may factor it in anyway. Confirm with your mortgage lender before you borrow.
Home equity loans and lines of credit
If you own a home with equity—the difference between what it is worth and what you owe—you can borrow against that equity. A home equity loan is a lump sum you receive upfront and repay over a fixed term, usually 5 to 15 years. A HELOC is a line of credit you draw from as needed, with a variable interest rate. Both are secured by your home, so rates are lower than personal loans, typically 7 to 12 percent.
The risk is real: if you cannot repay, the lender can foreclose. You also reset the clock on your mortgage—a home equity loan extends your total debt repayment timeline. Mortgage lenders will count both the loan balance and the monthly payment toward your DTI, so you face the same approval risk as a personal loan.
A HELOC has an additional complication: the interest rate adjusts with the market. If rates rise, your monthly payment rises too. Some lenders offer a fixed-rate option on part of the draw, which locks in the rate on that portion. Ask whether your lender offers this before you commit.
Borrowing from family and documenting the loan
A family loan is often the cheapest option—many family members charge no interest or a rate well below market. The problem is that mortgage lenders cannot tell the difference between a gift and a loan unless you document it. If you tell the lender it is a gift but it is actually a loan, you have committed fraud.
If you borrow from family, create a written agreement that states the loan amount, the interest rate (even if it is zero), the repayment term, and the monthly payment. Both you and the lender should sign and date it. Keep copies. When you apply for a mortgage, the lender will ask whether the down payment money is a gift or a loan. If it is a loan, provide the agreement and bank statements showing the transfer.
Some mortgage lenders will reject you if the down payment is a family loan, because they see it as hidden debt. Others will count the monthly payment toward your DTI. A few will accept it if the family member agrees to forgive the loan after closing—at which point it becomes a gift. Ask your mortgage lender what they will accept before you borrow.
Credit cards and cash advances
Credit cards are the fastest way to access borrowed money—you can use the card immediately—but also the most expensive. A regular credit card purchase for a down payment counts as revolving debt and shows up on your credit report within days, hurting your DTI and credit score. A cash advance is even worse: interest rates typically start at 25 to 30 percent and accrue immediately with no grace period. Some cards charge a 3 to 5 percent fee on top of the interest.
Using a credit card for a down payment will almost certainly disqualify you from a mortgage. Lenders see it as a sign of financial distress. If you are desperate enough to put a down payment on a credit card, you are not ready to buy a house. Avoid this option entirely.
Payday loans and other high-cost options
Payday loans, title loans, and other short-term high-cost lenders charge interest rates of 200 to 400 percent annually. A $5,000 payday loan might cost you $1,200 in fees and interest over two weeks. These loans are designed to trap you in a cycle of rolling debt, and they will destroy your mortgage approval. Do not use them for a down payment under any circumstance.
If you cannot afford a down payment without a payday loan, you cannot afford to buy a house right now. Save longer, improve your income, or explore down payment assistance programs in your area instead.
What to disclose to your mortgage lender
Your mortgage lender will ask about the source of your down payment money. You must answer truthfully. The lender will request bank statements showing where the money came from and where it went. If you received a gift, the lender will ask for a gift letter from the donor stating that the money is a gift and does not need to be repaid. If you borrowed money, you must disclose the loan, provide the loan agreement, and explain how you will repay it.
Lying about the source of down payment money is mortgage fraud. The penalties include loan denial, foreclosure, fines, and criminal charges. It is not worth the risk. If your lender says no to borrowed money, accept it and explore other options: save more, wait for your income to rise, or look for down payment assistance programs.
Frequently Asked Questions
Can I borrow money for a down payment if I have bad credit?
Yes, but the interest rate will be higher—often 25 to 36 percent for a personal loan. You may also struggle to get approved for a mortgage with bad credit, regardless of where the down payment comes from. Focus on improving your credit score before you borrow or buy.
Will a family loan hurt my mortgage approval?
It depends on your lender. Some will reject you if the down payment is a loan rather than a gift. Others will count the monthly payment toward your debt-to-income ratio. Ask your mortgage lender in writing before you borrow from family.
What if I borrow from my 401(k) and then leave my job?
You typically have 60 days to repay the loan or it becomes a taxable distribution. If you are under 59½, you also owe a 10 percent penalty on the unpaid balance. The total tax bill can be substantial, so only borrow if you are confident you will stay in your job.
Can I use a credit card to pay the down payment directly to the seller?
Most title companies and real estate agents will not accept credit card payments for down payments because of fraud risk and high processing fees. Even if they did, your mortgage lender would see the credit card debt and likely deny your loan.
Is there a way to borrow for a down payment without the lender knowing?
No. Mortgage lenders review bank statements, credit reports, and loan documents. They will find any borrowed money. Hiding it is fraud and will result in loan denial or foreclosure. Be honest with your lender about where the money comes from.