The most common sources are your own savings, gifts from family, and loans against retirement accounts

Most people fund a down payment through a combination of three things: money they have saved, money given to them by family members, and sometimes a loan from their own retirement account. The mix depends on your situation and what your lender will accept. Some sources come with tax consequences or repayment obligations; others do not. The key is understanding what each option costs you and what paperwork your lender will require.

Your lender will ask where the money came from. They do this to prevent fraud and to make sure you are not borrowing the down payment itself, which would disqualify you for most mortgages. Be prepared to show bank statements, gift letters, or loan documents depending on which sources you use.

Key Takeaways

  • Savings accounts, money market accounts, and certificates of deposit are the cleanest sources because they require only bank statements and no repayment.
  • Family gifts do not have to be repaid, but your lender will require a signed letter from the giver stating the money is a gift, not a loan.
  • Borrowing from a 401(k) or traditional IRA lets you access your own money without income tax on the withdrawal, but you may owe taxes if you cannot repay the loan within the allowed timeframe.
  • Employer down payment information programs, state first-time buyer grants, and non-profit grants exist but vary widely by location and employer, so you will need to search for programs in your area.
  • Borrowing from family as a loan is possible but requires a formal promissory note and regular payment schedule, or your lender may treat it as a gift and count it against your debt-to-income ratio.

Using savings and investment accounts you already own

Money in a regular savings account, money market account, or certificate of deposit (CD) is the simplest source. Your lender will ask for two or three months of bank statements showing the balance. No gift letter is needed, no repayment is required, and there are no tax consequences. This is the path with the fewest complications.

If you have money in a taxable brokerage account, you can withdraw it, but you may owe capital gains tax on the profit when you sell. Check with a tax professional before withdrawing, because the tax bill could be substantial. If you have a Health Savings Account (HSA), you can withdraw money for any reason, but non-medical withdrawals are taxed as income plus a 20 percent penalty.

If you are close to your down payment goal but short by a few thousand dollars, moving money from a lower-yield account into a high-yield savings account in the months before closing can help you reach the target without taking on debt. Just do this early enough that the deposits show up in your bank statements—lenders typically want to see the money sitting there for at least 60 days.

Accepting a gift from a family member

A gift from a parent, grandparent, sibling, or other relative does not have to be repaid and does not count as debt on your mortgage process. However, your lender will require a gift letter—a signed statement from the person giving the money that says it is a gift, not a loan, and that they do not expect repayment.

The gift letter must include the giver's name, the amount, the date, and a statement that the funds are a gift with no repayment expected. Some lenders have a specific form they want you to use; ask your loan officer for their template. The giver does not have to be a close relative—a friend can give you a gift—but your lender may ask follow-up questions if the relationship is not family.

The person giving the gift does not owe federal tax on it, and you do not owe tax on receiving it. The giver only owes tax if they have given more than $18,000 to you in a single year (as of 2024; this amount changes annually), and even then it is usually just a reporting requirement, not an actual tax bill. Check the IRS website or ask a tax professional if the amount is large.

Borrowing from your 401(k) or IRA

If you have a 401(k) through your employer, you can usually borrow against it without triggering income tax on the withdrawal. The loan has to be repaid on a set schedule, typically five years, though some plans allow longer terms for a home purchase. You pay interest to yourself, which goes back into your account. Your lender will want to see the loan agreement and proof of the repayment terms.

A traditional IRA allows you to withdraw up to $10,000 penalty-free for a first-time home purchase (defined as not owning a home in the past two years). This is a withdrawal, not a loan, so you do not repay it. However, the $10,000 is counted as income for that tax year, so you will owe income tax on it. If you are under 59½, you would normally owe a 10 percent early withdrawal penalty, but the first-time buyer exception waives that penalty.

A Roth IRA works differently. You can withdraw contributions (the money you put in) at any time without tax or penalty. You can also withdraw up to $10,000 in earnings penalty-free for a first-time home purchase, but earnings are taxed as income. The advantage of a Roth is that you can access your contributions without any tax consequence.

Before borrowing from retirement savings, understand what you are giving up. Money borrowed from a 401(k) is not growing in the market while you repay it. If you leave your job, the loan may have to be repaid quickly or it becomes a taxable withdrawal. Talk to a tax professional or financial advisor before taking this step.

Employer down payment information and grants

Some employers offer down payment information as part of their benefits package. This might be a direct payment toward your down payment, a matching program where the employer matches what you save, or a forgivable loan that does not have to be repaid if you stay with the company for a set period. Ask your human resources department whether your employer has such a program.

State and local governments sometimes offer down payment grants or forgivable loans for first-time buyers or buyers in certain income ranges. These programs vary dramatically by location and change frequently. Start by searching "[your state] first-time homebuyer grant" or "[your city] down payment information." Your state housing finance agency website usually lists current programs. Non-profit organizations like NeighborWorks America also maintain databases of local programs.

Many of these programs have income limits, purchase price limits, or requirements that you complete a homebuyer education course. Some are only open during certain times of the year or until funding runs out. Because availability changes, you will need to contact your local housing authority or search current listings rather than relying on outdated information.

Borrowing from family as a formal loan

If a family member lends you money rather than giving it as a gift, the loan must be documented. Your lender will treat an undocumented family loan as a gift (which affects how they calculate your debt-to-income ratio) or as fraud if they discover you misrepresented it. A promissory note is a straightforward written agreement stating the loan amount, the interest rate, the monthly payment, and the repayment term.

The promissory note does not have to be complicated. It can be a one-page document signed by both you and the lender. Some people use templates from online legal document services; others have a lawyer draft one for a modest fee. Your lender will ask to see this document and may ask for proof that payments are being made on time.

If you charge interest, the rate should be reasonable—at least the IRS minimum rate, which changes quarterly. As of early 2024, the IRS Applicable Federal Rate for loans under nine years is around 5 percent, though you can charge less. If you charge no interest, document that clearly in the note. The lender may owe tax on the interest they would have earned, but this is a tax reporting issue, not a mortgage issue.

Combining multiple sources

Most down payments come from a mix of sources. You might use $20,000 in savings, a $15,000 gift from parents, and a $5,000 withdrawal from your IRA. Your lender will ask you to document each source separately. Bring bank statements for the savings, a gift letter for the parental money, and the IRA withdrawal statement for the retirement account.

The order in which you combine sources matters for tax purposes. If you are withdrawing from a retirement account, do that first and let the money sit in your bank account for at least 60 days before closing, so it appears as savings on your final bank statements. This avoids questions about where the money came from.

If you are short on down payment funds and considering multiple sources, prioritize the ones with no tax consequence or repayment obligation first: savings, then gifts, then retirement account loans or withdrawals. This keeps your long-term finances simpler.

Frequently Asked Questions

Can I borrow the down payment from a credit card or personal loan?

No. Most lenders will reject a mortgage process if the down payment itself is borrowed. However, if you use a personal loan or credit card to pay off debt before explore, that can improve your debt-to-income ratio and make you a stronger candidate. The down payment itself must come from savings, gifts, or your own retirement accounts.

What if I do not have enough for a 20 percent down payment?

You do not need 20 percent. Many mortgages accept 10 percent, 5 percent, or even 3 percent down. With less than 20 percent, you will pay mortgage insurance (PMI), which increases your monthly payment. The lower your down payment, the higher the insurance cost. Compare the total cost of a smaller down payment plus PMI against saving longer for a larger down payment.

Do I have to show where every dollar came from?

Yes. Your lender will ask for bank statements going back two or three months and will trace large deposits. If you receive a large sum of money shortly before closing, be ready to explain it. Gifts need a letter; loans need documentation; withdrawals need account statements. Unexplained deposits can delay closing.

Can I use a 529 college savings plan for a down payment?

Not without tax consequences. A 529 plan is designed for education expenses. Withdrawing for a down payment counts as a non-may have access to withdrawal, which means you owe income tax on the earnings plus a 10 percent penalty. The contribution portion (money you put in) comes out tax-free, but the growth does not. This is usually not worth it unless the amount is small.

What if my family member wants to stay anonymous about the gift?

They cannot. Your lender requires a gift letter signed by the person giving the money, with their name and contact information. This is a federal requirement to prevent fraud and money laundering. The gift letter is not public; it goes to your lender only. If someone is unwilling to sign a gift letter, the money cannot be used as a gift for mortgage purposes.