Lenders require borrowers to use their own money for a down payment in most cases. It makes you have ‘skin in the game.’ Lenders feel that borrowers will have a better chance of making their mortgage payments on time if they use their own money.
There are exceptions to this rule, though, which we discuss below.
First, we would like to note that many loan programs allow the use of gift funds. These aren’t ‘borrowed’ funds. Instead, they are funds a relative, employer, or charitable organization gives you to use for your down payment. The donor doesn’t expect repayment and they state this fact in the required Gift Letter.
If you can’t get gift funds or you really don’t have access to funds to put down on a home, though, you have a few other options.
Borrow From Your 401K
The only true way to ‘borrow’ money to buy a home is to borrow from your 401K. You must get employer approval before you do this. If you are fully vested and have a substantial amount saved, you may be able to make it work. Each employer has different rules regarding how much you can borrow and how you repay it, so you want to pay close attention to the rules you must follow.
In any case, you won’t be able to borrow more than 50% of your vested balance or a maximum of $50,000, whichever is lower. This is the law. But you still want to check to see what repayment options you have. Even though you are paying yourself back, your employer will likely be strict about how much you pay back and when you pay it.
Get a Piggy Back Loan
The piggyback loan essentially allows you to borrow a portion of your down payment. You still have to put a little money of your own down, but less than you would if you didn’t get the piggyback loan. The piggyback loan is most common for borrowers that want to avoid PMI and have at least 10% of their own money to put down on the home.
The piggyback loan is also called the 80/10/10 loan. The first 80% of the home’s price comes from the 1st mortgage. At 80%, borrowers don’t need to pay Private Mortgage Insurance. Then 10% of the money is in the form of a second mortgage or the piggyback loan. This could be from the same lender or a different lender. You then have two mortgage payments to make each month.
The final 10% is the money from you. So while you can borrow 10% of the down payment, you do still have to come up with 10% of the funds on your own.
Withdraw From Your IRA
If you have an individual retirement account, you may be able to withdraw funds (not borrow them) for your down payment if you meet certain requirements:
– You must be a first-time homebuyer or not have owned a home for at least 2 years
– You can only borrow up to $10,000
– You can only borrow from your IRA one time in your lifetime
– You can’t borrow the funds until you are less than 120 out from the loan closing
Use a Personal Loan or Credit Card Advance
While it’s frowned upon, you may be able to get a personal loan or credit card advance and use the funds for your down payment.
First, you should know that you’ll have to get access to these funds long before you apply for a mortgage. Typically, lenders look at your bank statements for the last 2 months, but it’s not unheard of for lenders to go back a little earlier, especially if they think you’ve borrowed funds.
Essentially, the earlier you deposit a large amount of funds in your bank account the better your chances of approval. You want your average balance to be as high as possible. If you deposit funds from a personal loan or credit card advance too close to the date you apply for the loan, the lender will see the large deposit. Instead, you want the funds in there 4-6 months before you apply for the loan. This way they look like ‘seasoned’ funds and the lender won’t question them.
Of course, the best way to pay for a down payment is to save the money yourself. Starting as early as possible will help you have the largest down payment. Gift funds are also a great acceptable way to get the funds you need for a down payment.