Can You Get a Loan for a Down Payment on a House?

All About Down Payment Financing

A woman carries a box of belongings up the stairs.
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 Catherine Delahaye / Getty Images

A down payment is the cash you need to pay for part of a home upfront when you’re using a home loan. Down payments are usually expressed as a percentage of the home price. Lenders require them for most home loans. 

If you don’t have enough cash for a down payment, you may wonder whether you can get a loan. Let's review your options for getting a home loan for a down payment as well as detail the pros and cons of using one.

Key Takeaways

  • You may be able to finance a house down payment with a personal loan, home equity loan, or a down payment assistance program.
  • Most lenders prefer your down payment to be paid in cash.
  • If you don’t have enough cash for a down payment, you might want to either delay your home purchase, choose a home loan with lower down payment requirements, or explore down payment assistance grants.

How To Finance a Down Payment on a House

There are a number of ways you may be able to finance your down payment, from personal loans to grants. Let’s look at each option in more detail.

Personal Loan

While it’s technically possible to use a personal loan as a down payment, it’s unlikely that a lender will allow you to pursue this strategy. This is mainly because lenders consider your debt-to-income or DTI ratio (your monthly debt payments divided by your gross monthly income) when they review your mortgage application.

Most lenders prefer a DTI of 50% or less, and personal loans can increase your DTI, which is why you may need to have cash in the bank instead of a loan.

'Piggyback' HELOC or Home Equity Loan

If your down payment is less than 20%, lenders will likely charge you private mortgage insurance or PMI. You might be able to avoid PMI, however, if you “piggyback” a home equity line of credit (HELOC) or home equity loan onto your primary mortgage and put some money down.

For example, you may put 5% down, borrow 85% with a traditional mortgage, and borrow the remaining 10% with a piggyback HELOC.

The downside of a piggyback HELOC home loan is that it may come with a higher adjustable interest rate, which can make it difficult to budget for your payments.

Down Payment Assistance 

Down payment assistance (DPA) is designed to help homebuyers who may not be able to afford a down payment for a home.

Assistance may be in the form of a grant that you don’t have to pay back or as a low- or no-interest loan known as a second mortgage. While DPA programs vary by state, you’ll likely need to meet a minimum credit score and debt-to-income ratio. You might also be required to complete a homebuyer class. 

To find down payment assistance programs in your state, consult your housing or finance authority. 

Pros and Cons of Getting a Loan for a Down Payment

Just like any financial strategy, taking out a loan to pay for a house down payment has benefits and drawbacks. 

Pros
  • Easier to afford a home

  • Won’t have to wait to save cash

  • May be able to deduct interest on your taxes


Cons
  • Can lead to future financial stress

  • Might prolong the closing process 

  • No guarantee of approval


Pros Explained

  • Easier to afford a home: Using a loan to cover a down payment on a house can make homeownership more affordable, especially if you don’t have a lot of cash at your disposal. 
  • Won’t have to wait to save cash: Whenever you get approved for some form of down payment financing, you can use the funds toward buying a home.
  • May be able to deduct interest on your taxes: If you go with a HELOC or home equity loan, for example, you might qualify for a tax deduction on the interest you pay.

Cons Explained

  • Can lead to future financial stress: You’ll have to repay any loan that you take out. So if you take a new loan, you’ll need to factor in repayments to your monthly costs.
  • Might prolong the closing process: Financing a home loan down payment adds a layer of complexity to the homebuying process and can potentially extend the closing process. 
  • No guarantee of approval: Most lenders prefer cash down payments, so your lender might not accept a down payment in the form of a loan. 

Should You Get a Loan for Your Down Payment?

Ideally, you would use cash and never take out a loan to pay for a down payment for a house. But if you don’t have enough cash saved up and need a house as soon as possible, taking out a loan may be an option. By paying in cash, you can increase your chances of home loan approval and avoid complexity and financial issues down the road. 

Alternatives to Down Payment Loans

Here are a few ways to come up with a down payment without financing. 

  • Delayed purchase: Wait to buy a home until you’ve saved a substantial down payment. While this may mean delaying homeownership by a few months or years, this strategy can benefit you in the long run.
  • Loans with lower down payment requirements: If you can’t come up with the 20% down payment that is typically required for a conventional home loan, consider other loans like FHA loans and VA loans, which have lower down payment criteria. 
  • Down payment assistance grants: Since you don’t have to repay down payment assistance grants, they’re worth exploring if your state offers them. 

Frequently Asked Questions (FAQs)

How much is the typical down payment for a house?

The down payment you need to buy a house depends on the loan program you choose. While you can get a home loan with only 3% down, or in some cases no money down, most loans require a down payment of at least 5% or more. A down payment of 20% or more will help you avoid paying PMI.

Where should you stash your down payment while you’re saving up for a house?

Consider keeping your down payment funds in a low-risk account like a high-yield savings account. With an account that helps you earn modest interest, you’ll be able to earn money while still being able to access the money at any time.

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Article Sources

  1. Fannie Mae. “What Is the Maximum DTI Ratio Allowed?

  2. U.S. Consumer Financial Protection Bureau. “What Is a “Piggyback” Second Mortgage?

  3. IRS. “Interest on Home Equity Loans Often Still Deductible Under New Law.”

  4. Consumer Financial Protection Bureau. “Determine Your Down Payment.”