The main sources for down payment loans

You can borrow down payment money from a bank, credit union, family member, or your own retirement account. Each source has different rules about how much you can borrow, what you pay back, and whether the lender will even allow it. A mortgage lender will want to know where your down payment came from, so understanding your options before you start matters.

The most common route is a personal loan from a bank or credit union — you borrow a set amount, get the money in your account, and pay it back in monthly installments. A second mortgage or home equity loan works if you already own property. Family loans are free of interest but require clear written terms. Retirement account withdrawals are possible but carry tax penalties in most cases.

Your mortgage lender will ask for bank statements showing where the down payment came from. If the money appeared suddenly without explanation, they may delay closing or ask you to document its source. This is called gift letter verification or source of funds documentation, and it protects the lender from lending on money that was itself borrowed illegally.

Key Takeaways

  • Personal loans from banks and credit unions are the fastest way to borrow down payment money, though they charge interest and require a credit check.
  • Your mortgage lender will ask where your down payment came from, so you need to be able to document the source before closing day.
  • Family loans must be documented in writing with clear repayment terms, or the mortgage lender may treat the money as a gift and change your loan terms.
  • Borrowing from a retirement account like a 401(k) or IRA is possible but triggers taxes and penalties unless you meet specific conditions.
  • A second mortgage or home equity loan uses property you already own as collateral and typically has lower interest rates than personal loans.

Personal loans from banks and credit unions

A personal loan is money a lender gives you with no strings attached — you don't have to tell them what you're buying it for. You receive the full amount upfront, then repay it in fixed monthly payments over a set period, usually two to seven years. The interest rate depends on your credit score, income, and the lender's policies.

Banks and credit unions both offer personal loans, but credit unions often have lower rates if you're a member. You'll need to show proof of income (recent pay stubs or tax returns), have an acceptable credit score (usually 620 or higher, though better rates require 700+), and have a debt-to-income ratio the lender approves. The whole process typically takes three to seven business days.

The catch is that a mortgage lender will see this new loan on your credit report and may lower the amount they're willing to lend you for the house itself. They calculate how much you can afford based on your total monthly debt payments, so a new personal loan payment reduces that number. Ask your mortgage lender before taking out a personal loan whether it will affect your mortgage amount.

Borrowing from family members

A family loan costs you nothing in interest and has no credit check. The lender is someone you know and trust, and you can negotiate repayment terms that work for both of you. Many families do this informally, but your mortgage lender will require a written agreement to treat it as a real loan rather than a gift.

The written agreement — called a promissory note — must state the loan amount, the interest rate (which can be zero), the monthly payment amount, and the date the loan will be paid off. Both you and the family member sign it. Without this document, the mortgage lender may assume the money was a gift, which changes your loan terms and may require the family member to sign a separate gift letter stating they expect no repayment.

If you do write a promissory note, the IRS requires you to charge at least a minimum interest rate called the Applicable Federal Rate, or AFR. This rate changes monthly and is currently in the range of 5 to 6 percent, though it varies. You can charge more, but not less, or the IRS may treat the difference as a taxable gift. Check the IRS website for the current AFR before finalizing the terms with your family member.

Second mortgages and home equity loans

If you already own a home, you can borrow against the equity you've built up — the difference between what your home is worth and what you still owe on the mortgage. This is called a second mortgage or home equity loan. The interest rate is usually lower than a personal loan because the lender can take your house if you don't pay.

A home equity loan gives you a lump sum upfront, similar to a personal loan. A home equity line of credit, or HELOC, works more like a credit card — you can borrow up to a set limit whenever you need it, and you only pay interest on what you actually use. Both require an appraisal of your home and a credit check, and both take two to four weeks to close.

The advantage is a lower interest rate and potentially tax-deductible interest (though this depends on how you use the money — consult a tax professional). The disadvantage is that you're putting your current home at risk. If you can't repay the second mortgage, the lender can foreclose, and you could lose the house you're using as collateral.

Borrowing from retirement accounts

You can withdraw money from a 401(k) or IRA to use as a down payment, but the rules are strict and the tax consequences are real. A 401(k) loan lets you borrow from your own account and repay it to yourself over time, usually five years. You don't owe income tax on the money you borrow, only on the interest you pay yourself.

An IRA withdrawal is different. If you're a first-time homebuyer, you can withdraw up to $10,000 from a traditional IRA without the usual 10 percent early withdrawal penalty, but you still owe income tax on the amount withdrawn. A Roth IRA lets you withdraw contributions (the money you put in) tax-free at any time, but earnings (the money your investments made) are taxed and penalized if you withdraw them before age 59½.

The risk of a 401(k) loan is that if you leave your job, you typically have to repay the loan within 60 days or it becomes a taxable withdrawal. You also stop contributing to that account while you're repaying the loan, which means you miss out on employer matching and years of growth. Talk to your plan administrator about the exact rules for your account before deciding.

What mortgage lenders need to see

Your mortgage lender will ask for bank statements from the past two months showing your down payment money. If you borrowed the money, they need to see where it came from. For a personal loan, they'll see it as a deposit in your bank account and will ask for the loan agreement or a letter from the lender confirming it's a loan, not a gift.

For a family loan, bring the promissory note you both signed. For a 401(k) loan, bring the loan agreement from your plan administrator. For a second mortgage or HELOC, bring the closing documents. The lender is checking that you didn't borrow the down payment money illegally or from another source that would make the mortgage itself risky.

If the down payment money came from multiple sources — part from savings, part from a personal loan, part from family — document each source separately. Write a letter explaining the breakdown and attach supporting documents for each piece. This takes a few extra days but prevents delays at closing.

How borrowing for a down payment affects your mortgage

When you borrow money for a down payment, your mortgage lender recalculates how much house you can afford. They use your debt-to-income ratio, which is the total of all your monthly debt payments divided by your gross monthly income. Most lenders want this ratio to be 43 percent or lower.

A new personal loan adds a monthly payment to that calculation, which lowers the mortgage amount you may have access to for. A family loan with no payment (or a very low payment) has less impact. A 401(k) loan has almost no impact because you're borrowing from yourself. A second mortgage adds a payment that counts against your ratio.

The timing matters too. If you take out a personal loan three months before explore for a mortgage, the lender sees it as established debt and factors it in. If you take it out one week before explore, the lender may still see it as new debt and be more cautious. Talk to a mortgage lender before borrowing to understand how it will change your loan amount.

Frequently Asked Questions

Can I borrow the down payment from my 401(k) and still get a mortgage?

Yes, but the mortgage lender will see the 401(k) loan as a monthly debt payment and reduce how much they'll lend you. If you borrow $30,000 and repay it over five years, that's roughly $550 per month that counts against your debt-to-income ratio. Ask your mortgage lender how much this will lower your loan amount before you take the 401(k) loan.

What if I can't pay back a family loan before closing?

The mortgage lender needs to see a written promissory note with a repayment schedule. As long as the note exists and both parties signed it, the lender will treat it as a loan. You don't have to pay it back before closing — you just have to prove the agreement exists and is documented.

Does borrowing for a down payment hurt my credit score?

Taking out a personal loan will temporarily lower your score because it's a new account and a hard inquiry. Over time, making on-time payments will rebuild it. A family loan with a promissory note doesn't appear on your credit report unless the family member reports it to a credit bureau, which is rare.

Can I borrow from multiple sources for one down payment?

Yes. You can use savings, a personal loan, a family loan, and a 401(k) withdrawal all for the same down payment. Document each source separately with bank statements and loan agreements, then write a letter to your mortgage lender explaining the breakdown. This requires more paperwork but is completely normal.

What's the difference between a gift and a loan for down payment purposes?

A gift is money someone gives you with no expectation of repayment. A loan is money you're expected to pay back. The mortgage lender treats them differently: a gift doesn't add to your debt, but a loan does. If you borrow from family, get it in writing as a promissory note so the lender knows it's a loan, not a gift.