How to Borrow Money for a Down Payment on a House
Where down payment loans come from and how they work
A down payment loan is money you borrow specifically to cover the cash you need upfront when buying a house. Unlike a mortgage, which finances the house itself, a down payment loan is a separate debt you take on before the mortgage even starts. The lender gives you a lump sum, you hand it to the seller or title company as your down payment, and then you repay the loan on its own schedule—usually monthly, over a set number of years.
The most common sources are personal loans from banks or credit unions, home equity loans if you already own property, and gift loans from family members (which must be documented in writing to satisfy mortgage lenders). Some mortgage lenders also offer piggyback loans—a second loan that sits behind your main mortgage—though these have become less common since 2008. A few state and local programs offer down payment assistance as grants or forgivable loans, meaning you don't repay them if you meet certain conditions, but these are limited and vary widely by location.
Key Takeaways
- Down payment loans are separate debts from your mortgage and must be repaid on their own terms, which affects how much total debt you carry into homeownership.
- Personal loans from banks or credit unions typically charge higher interest rates than mortgages but don't require collateral or a waiting period before you buy.
- Family loans must be documented in writing with a promissory note and repayment schedule, or your mortgage lender may refuse to count your down payment as your own money.
- State and local down payment assistance programs exist but are often closed to new applicants, have income limits, and require you to complete homebuyer education first.
- Borrowing for a down payment increases your total monthly debt obligations and may lower the mortgage amount you can afford, even if the down payment loan is temporary.
Personal loans: speed and flexibility, at a cost
A personal loan from a bank, credit union, or online lender is the fastest way to get down payment money if you don't have it saved. You apply, the lender checks your credit and income, and if approved, you receive the funds in your bank account within days or weeks. You then use that money as your down payment. The lender doesn't care what you spend it on—that's the trade-off for the speed and simplicity.
The catch is interest rate and monthly payment. Personal loans typically carry interest rates between 6% and 36%, depending on your credit score, income, and the lender. A $30,000 personal loan at 12% interest over five years costs you roughly $665 per month. That payment counts against your debt-to-income ratio when the mortgage lender calculates how much house you can afford, which means borrowing for a down payment can actually reduce the size of the mortgage you may have access to for. Some mortgage lenders also require that the personal loan be paid off before closing, which defeats the purpose unless you have the cash to do both.
Credit unions often offer lower rates than banks if you're a member, and some have specific down payment loan products. It's worth calling your credit union first if you belong to one.
Home equity loans and lines of credit: using what you already own
If you already own a home and have built equity in it—meaning you've paid down the mortgage or the home has increased in value—you can borrow against that equity to fund a down payment on a second property. A home equity loan gives you a lump sum upfront; a home equity line of credit (HELOC) works like a credit card, letting you draw what you need when you need it.
Home equity loans typically carry lower interest rates than personal loans because the lender can foreclose on your existing home if you don't repay. That lower rate is the advantage. The risk is that you're putting your current home on the line. If you can't make payments on both the equity loan and your new mortgage, the lender can take your existing house.
The application process is similar to refinancing: the lender orders an appraisal, verifies your income, and pulls your credit. It usually takes two to four weeks. HELOCs sometimes have variable interest rates, meaning your monthly payment can change if rates rise, so read the terms carefully before committing.
Family loans: the paperwork that protects everyone
Borrowing from a parent, grandparent, or other family member can be the cheapest option—many family loans carry no interest or very low interest. But mortgage lenders require proof that the money is a loan, not a gift. Without documentation, the lender may treat it as a gift and require the gift-giver to sign a statement saying they expect no repayment, which can disqualify you from certain loan programs or change how much you can borrow.
To document a family loan, you need a promissory note—a written agreement that states the loan amount, the interest rate (even if it's 0%), the monthly payment amount, and the repayment term. Both you and the lender sign it. You don't need a lawyer to create one; templates are available free online, and many banks provide them. When you apply for a mortgage, you'll submit a copy of the promissory note and proof that you've been making payments (bank statements showing transfers, cancelled checks, or a payment log).
The mortgage lender may also ask the family member to sign a statement confirming the loan exists and that they understand it must be repaid. This protects the mortgage lender by proving the down payment money is actually yours, not borrowed from someone else.
State and local down payment assistance programs
Some states, counties, and cities offer grants or forgivable loans specifically for down payments. These programs typically target first-time homebuyers, people with lower incomes, or buyers in specific neighborhoods. The money may be a grant (you don't repay it), a forgivable loan (you repay it only if you sell the house within a certain number of years), or a low-interest loan.
The catch is availability and restrictions. Many programs are funded annually and close once the money runs out. Others require you to complete a homebuyer education course before you can apply, which takes four to eight weeks. Income limits vary—some cap household income at 80% of the area median income, others at 120%. Down payment amounts are usually capped too, ranging from $5,000 to $25,000 depending on the program.
To find programs in your area, contact your city or county housing authority, or call 211 (a referral service) and ask about down payment assistance. Your mortgage lender or real estate agent may also know of local programs. Because programs change and close frequently, calling is faster than searching online.
How borrowing for a down payment affects your mortgage
Mortgage lenders calculate how much you can borrow based on your debt-to-income ratio—the total of all your monthly debt payments divided by your gross monthly income. Most lenders want this ratio to be 43% or lower. If you take out a personal loan for $30,000 at $665 per month, that payment reduces how much mortgage payment you can afford, which may lower the price of the house you can buy.
Some mortgage programs also have rules about down payment loans. Certain government-backed loans (FHA, VA, USDA) don't allow you to borrow for a down payment at all. Conventional loans usually allow it, but the lender may require the personal loan to be paid off before closing, or may count it differently in their calculations. Ask your mortgage lender about their specific rules before you take out a down payment loan.
If you're planning to borrow for a down payment, get pre-approved for your mortgage first. The pre-approval letter will tell you the maximum loan amount you may have access to for, which helps you decide whether a down payment loan makes sense for your situation.
Comparing your options at a glance
| Source | Speed | Interest Rate | Main Requirement | Main Risk |
|---|---|---|---|---|
| Personal loan | Days to 2 weeks | 6%–36% | Good credit, stable income | High monthly payment reduces mortgage you can afford |
| Home equity loan | 2–4 weeks | 4%–10% | Own a home with equity | Puts your current home at risk if you can't repay |
| Family loan | Days to weeks | 0%–5% (varies) | Willing family member, written agreement | Relationship strain if payments are missed |
| State/local assistance | 4–12 weeks | 0%–3% or grant | First-time buyer, income limit, education course | Limited funding, programs often closed |
Frequently Asked Questions
Can I borrow for a down payment and still get an FHA loan?
No. FHA loans require that your down payment come from your own savings, a gift from a family member, or a grant—not a loan. If you take out a personal loan or home equity loan for the down payment, you won't may have access to for an FHA loan. Conventional loans are more flexible, but you should confirm with your lender before borrowing.
What if I can't pay back the down payment loan before my mortgage closes?
Most lenders allow the down payment loan to continue after your mortgage closes, as long as your total monthly debt payments (including both loans) don't exceed their debt-to-income limits. However, some lenders require it to be paid off at closing. Ask your mortgage lender about their policy before you take out the down payment loan, so you're not surprised later.
Do I need a lawyer to write a family loan agreement?
No. A promissory note can be a simple written document signed by both parties. Many banks provide templates, and free templates are available online. The mortgage lender just needs proof that the loan exists and that repayment terms are documented. A lawyer can help if the loan is large or the family situation is complicated, but it's not required.
If my family gives me money as a gift, can I use it for a down payment?
Yes, but the mortgage lender will require a gift letter signed by the gift-giver stating that the money is a gift and they expect no repayment. The gift-giver may also need to provide proof of their own funds (bank statements) to show the money came from them and wasn't borrowed. If you later repay the gift-giver, the lender may view it as a loan you should have disclosed, so be clear upfront about whether it's a gift or a loan.
How long does it take to get approved for a down payment loan?
Personal loans from banks or credit unions typically take three to fourteen days from application to funding. Home equity loans take two to four weeks because they require an appraisal. State and local assistance programs take four to twelve weeks because they often require homebuyer education and have a formal review process. Family loans depend on how quickly you and your family member can sign the paperwork, usually within days.