How Down Payment Loans Work and Where to Find Them
What a down payment loan is and how it differs from a mortgage
A down payment loan is money you borrow specifically to cover the cash you need upfront when buying a home. It sits separate from your mortgage — the lender gives you a lump sum before closing, you use it to reach the down payment your mortgage lender requires, and then you repay the down payment loan on its own schedule with its own interest rate and terms.
The key difference: your mortgage lender finances the house itself. A down payment lender finances only the money you bring to the table. If you need $30,000 to reach a 10 percent down payment and you have $10,000 saved, a down payment loan covers that $20,000 gap. You then owe both the mortgage and the down payment loan, to two different lenders, on two different schedules.
Down payment loans come from several sources — banks, credit unions, non-profit housing organizations, and sometimes the seller or real estate agent — and the terms vary widely depending on who lends and what programs exist in your state or county.
Key Takeaways
- A down payment loan is a separate loan from your mortgage, borrowed only to cover your upfront cash requirement at closing.
- Common sources include banks, credit unions, non-profit housing organizations, and some state or local down payment assistance programs.
- Interest rates and repayment terms depend on the lender and program; some programs offer forgivable loans that don't require repayment if you stay in the home.
- Your mortgage lender may have restrictions on down payment loans — some require the loan to be subordinate (lower priority) or may not allow them at all.
- You will owe both your mortgage payment and your down payment loan payment each month, which affects how much total debt you can carry.
Where down payment loans come from
Banks and credit unions offer down payment loans as personal loans or home-specific products. These are conventional loans with set interest rates, usually ranging based on your credit score and income. You apply, get approved or denied, and if approved, the money arrives before closing. Repayment typically starts immediately or within a few months, and you pay interest on the full amount.
Non-profit housing organizations and community development financial institutions (CDFIs) often run down payment assistance programs in specific regions. These programs may offer lower interest rates, longer repayment periods, or forgivable loans — meaning the debt goes away if you live in the home for a set number of years (often 5 to 10). Some programs are free; others charge a small fee. Availability and terms vary by location.
State and local government programs exist in many places. Your state housing finance agency or your city or county housing authority may run down payment assistance for first-time buyers or buyers in certain income ranges. Some programs give grants (money you don't repay), others give loans. A few combine both — a grant plus a loan. Contact your state housing finance agency or search your county's housing authority website to learn what exists where you live.
Employer programs, seller concessions, and real estate agent networks sometimes offer down payment help, though these are less common and the terms are highly specific to each situation.
How your mortgage lender affects your down payment loan options
Your mortgage lender has the final say on whether you can use a down payment loan at all, and if so, what kind. Some lenders prohibit down payment loans entirely. Others allow them only if the loan is subordinate — meaning the down payment lender agrees in writing that the mortgage lender has first claim on the house if you default. Still others have no restrictions.
Before you commit to a down payment loan, tell your mortgage lender about it. Ask directly: "Can I use a down payment loan, and if so, does it need to be subordinate?" Get the answer in writing. If your mortgage lender says no, a down payment loan won't work for you, no matter how good the terms elsewhere.
Some mortgage programs — FHA loans, VA loans, USDA loans — have specific rules about down payment assistance. FHA allows certain down payment assistance programs but not others. VA and USDA have their own restrictions. If you're using one of these loan types, ask your lender which down payment loan sources are permitted.
Interest rates, fees, and what you'll actually owe
Interest rates on down payment loans vary. Bank and credit union personal loans typically charge 6 to 12 percent, depending on your credit score. Non-profit programs may charge 0 to 5 percent. Government programs sometimes charge nothing. Forgivable loans charge no interest because you don't repay them — instead, the debt is forgiven after you meet the program's conditions (usually staying in the home for 5 to 10 years).
Fees also vary. Some lenders charge an origination fee (1 to 3 percent of the loan amount), an application fee, or a processing fee. Non-profit and government programs often have no fees. Always ask what the total cost will be — not just the interest rate, but every fee rolled in.
When calculating what you can afford, remember you'll owe both payments. If you borrow $20,000 for a down payment at 8 percent over 5 years, your monthly payment is roughly $405. Add that to your mortgage payment, property taxes, insurance, and any other debts when your lender calculates your debt-to-income ratio. A down payment loan increases your monthly obligations, which can lower the mortgage amount you may have access to for.
Forgivable loans and what "forgiveness" actually means
Some down payment assistance programs offer forgivable loans — the debt disappears if you meet certain conditions. The most common condition is staying in the home as your primary residence for a set period, usually 5 to 10 years. If you sell or move before that time, the loan becomes due immediately, often in full.
Forgivable loans are valuable because you avoid interest and repayment if you stay put. But they come with a catch: you're locked in. If you need to move for a job, family, or any other reason before the forgiveness period ends, you owe the full amount at closing when you sell. Some programs allow you to pay it off early without penalty; others don't. Read the fine print before you accept a forgivable loan.
Forgiveness is also taxable income in some cases. The IRS may treat forgiven debt as income, which means you could owe taxes on it. Ask the program administrator whether forgiveness is taxable in your situation before you sign.
How to find down payment loan programs in your area
Start with your state housing finance agency. Search "[your state] housing finance agency" or visit the National Council of State Housing Agencies website to find the link for your state. They maintain lists of down payment assistance programs available to residents.
Contact your city or county housing authority. They often run or know about local programs. Search "[your city] housing authority" or "[your county] housing authority" to find their phone number and website.
Ask your mortgage lender or mortgage broker. They work with down payment assistance programs regularly and can tell you which ones they accept and which ones fit your situation.
Call 211 (dial 2-1-1 from any phone) or visit 211.org. This is a free referral service that connects you to local housing programs, including down payment assistance.
Check with non-profit housing organizations in your area. Search "community development financial institution [your state]" or "non-profit housing [your city]" to find local organizations that may offer down payment loans.
What happens if you can't find a down payment loan
If down payment loans aren't available or you don't may have access to, other paths exist. You can ask the seller to cover closing costs or offer a concession, which frees up more of your own cash for the down payment. You can delay buying until you've saved more. You can look into low-down-payment mortgage programs — FHA loans require 3.5 percent down, some conventional loans go as low as 3 percent, and VA and USDA loans require zero down if you're may be able to access.
You can also ask family members for a gift. Mortgage lenders allow down payment gifts from relatives in most cases, though they require a signed letter stating the money is a gift, not a loan you'll repay. This is different from a down payment loan because the lender knows you're not taking on additional debt.
Some employers offer down payment assistance as an employee benefit. Ask your HR department whether your company has a program.
Frequently Asked Questions
Can I use a down payment loan if I have bad credit?
Banks and credit unions will likely deny you or charge very high interest rates. Non-profit programs and some government programs are more flexible with credit scores and may still work with you. Contact local non-profits and your state housing finance agency to ask what they require. Expect to pay higher interest or provide additional documentation if your credit is low.
What if my mortgage lender won't allow a down payment loan?
You'll need to find another way to cover the down payment — save more, ask for a seller concession, use a family gift, or look into low-down-payment mortgage programs like FHA or USDA loans. Ask your lender which options they do allow before you rule out buying.
Do I have to repay a forgivable loan if I stay in the home?
No — if you meet the program's conditions (usually living in the home as your primary residence for 5 to 10 years), the debt is forgiven and you owe nothing. If you move or sell before the forgiveness period ends, the full loan amount is typically due at closing. Check your program's specific terms.
Will a down payment loan affect my mortgage approval?
Yes. The monthly payment on the down payment loan counts as debt when your mortgage lender calculates your debt-to-income ratio. This can lower the mortgage amount you may have access to for. Tell your lender about the down payment loan before you apply for the mortgage so they can factor it in accurately.
Can I get a down payment loan from a bank if I'm self-employed?
It's harder but possible. Banks typically require two years of tax returns and may ask for additional documentation of income. Non-profit programs and some government programs are often more flexible with self-employed borrowers. Start by asking non-profits and your state housing finance agency what they require.