Yes, you can borrow for a down payment, but most mortgage lenders restrict where that money comes from

A mortgage lender will let you use borrowed money for your down payment in some cases, but not all. The key rule: the lender wants to know the source of every dollar, and they do not want you borrowing against the house itself before you own it. A personal loan, a loan from a family member, or a gift from a relative all work differently in the lender's eyes, and each one changes what paperwork you need and what the lender will approve.

The reason lenders care is debt-to-income ratio. If you borrow $30,000 for a down payment and that loan has a monthly payment, that payment counts against your ability to pay the mortgage. A gift does not. This distinction matters enough that lenders ask directly: where is this money coming from, and do you have to pay it back?

Key Takeaways

  • A gift from a family member or close friend requires a signed gift letter stating the money does not have to be repaid, and the lender will verify the funds actually exist in the giver's account.
  • A personal loan counts as debt on your credit report and raises your debt-to-income ratio, which may lower the mortgage amount you can borrow.
  • Borrowing against retirement accounts like a 401(k) is possible through a loan provision, but it carries tax penalties if you leave your job or cannot repay it.
  • Most lenders prohibit borrowing against the house itself (a home equity loan or line of credit) before closing, because you do not yet own the property.
  • Down payment information programs run by nonprofits or government agencies may offer grants or forgivable loans that do not count as debt.

How lenders verify the source of down payment money

Before a mortgage lender approves your loan, they will ask for bank statements showing where your down payment came from. They typically want to see 60 days of statements from the account holding the money. If a large deposit appears in the last month or two, they will ask you to document it: a letter from your employer showing a bonus, a receipt from selling a car, or a gift letter if someone gave you the money.

This process is called source of funds verification. The lender is checking that you did not borrow the money without telling them, because borrowed money changes your debt load and your ability to repay the mortgage. If you took out a personal loan and deposited it into your checking account, the lender will see the deposit and ask where it came from. You will have to show the loan agreement, and that loan will now count against your debt-to-income ratio.

The verification happens before closing, so there is time to explain or provide documents. But if you cannot show where the money came from, the lender can delay closing or deny the loan entirely.

Personal loans and how they affect your mortgage approval

A personal loan from a bank, credit union, or online lender will work as a down payment source, but it costs you. The monthly payment on that personal loan counts as debt when the lender calculates your debt-to-income ratio. If you borrow $30,000 at a typical personal loan rate (8 to 12 percent) over five years, your monthly payment will be roughly $600 to $700. That payment reduces the mortgage amount you can borrow.

A mortgage lender uses a standard formula: your total monthly debt payments (car loans, credit cards, student loans, and now a personal loan) divided by your gross monthly income should not exceed 43 percent. If your income is $5,000 per month and you already have $1,500 in monthly debt, adding a $650 personal loan payment leaves you with only $850 of borrowing capacity for a mortgage payment. That might mean you can only borrow $150,000 instead of $200,000.

The timing also matters. If you take out a personal loan, wait at least two months before explore for a mortgage. The lender will want to see that you can handle the new payment without missing any. One missed payment in that window can tank your mortgage approval.

Gifts from family members and the gift letter requirement

A gift does not count as debt, so it does not affect your debt-to-income ratio. But the lender needs proof that it is actually a gift and not a loan you have to repay. This is where the gift letter comes in. The person giving you the money writes a letter stating that the funds are a gift, that they expect no repayment, and that they have no claim to the house. The letter must be signed and dated, and it must include the giver's name, address, phone number, and relationship to you.

The lender will also ask the gift giver to show proof that they have the money. This usually means a bank statement from the account the gift came from, dated within the last 60 days. The lender wants to confirm the money actually exists and was not borrowed by the gift giver themselves.

The gift can come from a parent, grandparent, sibling, or other close relative. Some lenders allow gifts from friends, but policies vary. Ask your lender before accepting money from someone outside your when ready family. The gift must be transferred to your account before closing, and you will need to show the transfer receipt or bank statement showing the deposit.

Borrowing from a 401(k) or retirement account

Many 401(k) plans allow you to borrow against your own balance. The loan comes from your account, not from a lender, so there is no credit check and no monthly payment reported to credit bureaus. You repay yourself through payroll deductions, usually over five years. For a mortgage lender, a 401(k) loan is less damaging than a personal loan because the payment is smaller and it does not appear on your credit report in the same way.

However, a 401(k) loan carries real risks. If you leave your job, you typically have to repay the full balance within 60 days or face income tax plus a 10 percent early withdrawal penalty. If you cannot repay it, the IRS treats it as a withdrawal, and you owe taxes on the amount plus the penalty. For someone in the 24 percent tax bracket, borrowing $30,000 could cost $7,200 in taxes and penalties if you cannot repay it.

Before borrowing from a 401(k), check your plan documents to see if loans are allowed and what the terms are. Not all plans offer this option. Also ask your mortgage lender how they will treat the loan in your debt-to-income calculation—some count the monthly repayment, others do not.

Home equity loans and why lenders prohibit them before closing

A home equity loan or home equity line of credit (HELOC) lets you borrow against the value of a house you already own. But you cannot use one for a down payment on a house you are buying, because you do not own that house yet. A lender cannot take a second mortgage on a property you do not have title to.

Some buyers try to use a HELOC on their current home to fund a down payment on a new home, and this can work—but only if you close on the HELOC before you explore for the mortgage on the new house. The HELOC payment will then count as debt in your debt-to-income ratio, just like a personal loan. The advantage is that HELOC rates are often lower than personal loan rates because they are secured by your home. The disadvantage is that you are now carrying two mortgage-like payments while you own two homes, which strains your finances during the transition.

Down payment information programs as an alternative to borrowing

Many states, cities, and nonprofits run down payment information programs that offer grants or forgivable loans. A grant is money you do not have to repay. A forgivable loan is a loan that disappears after you own the home for a set period (often five to ten years) without missing any payments. Neither counts as debt on your mortgage process.

These programs vary widely by location and income level. Some are run by state housing finance agencies, others by nonprofits like NeighborWorks or local community development organizations. may be able to access usually depends on your income (often capped at 80 to 120 percent of area median income), your credit score (usually 620 or higher), and the price of the home you are buying. The amount available ranges from a few thousand dollars to 10 or 15 percent of the purchase price, depending on the program.

To find programs in your area, start with your state housing finance agency website or a local nonprofit focused on homeownership. Your mortgage lender may also have a list of programs they work with regularly. These programs move slowly—approval can take four to eight weeks—so start looking early in your home search.

Frequently Asked Questions

If I get a gift from my parents, do they have to report it to the IRS?

No. Gifts are not taxable income to the person receiving them. Your parents do not owe taxes on the gift, and you do not owe taxes on receiving it. The IRS only cares about gifts if they exceed $18,000 per person per year (as of 2024), and even then, the giver files a form but owes no tax unless they have given away more than $13.61 million in their lifetime. Your mortgage lender does not care about IRS gift limits—they only need the gift letter.

Can I borrow from my savings account to make a down payment?

Yes, and it requires no documentation. Money you already have in your own account is not borrowed money, so the lender will not question it. You will still need to show bank statements proving the money has been there for at least 60 days, but you do not need to explain where it came from originally.

What happens if I lie about where my down payment came from?

Mortgage fraud is a federal crime. If you claim a personal loan is a gift, or hide a loan from your lender, you can face criminal charges, fines, and prison time. Lenders verify sources through bank statements and credit reports, so the lie usually surfaces during underwriting. It is not worth the risk.

Can I borrow money from my employer for a down payment?

Some employers offer down payment information or loans to employees, but it is rare. If your employer does, the loan will count as debt on your mortgage process. You will need to show the loan agreement to your mortgage lender and explain the terms. The lender will factor the monthly payment into your debt-to-income ratio.

Does a co-signer's gift count toward my down payment?

Yes, if the co-signer provides a gift letter. The co-signer's gift is treated the same way as any other gift—it requires a signed letter stating no repayment is expected. The co-signer does not have to be a relative, but the lender will want to verify the funds exist in their account before closing.