You can use a loan for a down payment on a house, but only if the loan is secured by an asset you already own, such as a 401(k) balance, a life insurance policy’s cash value, or existing real estate. Unsecured personal loans and credit card cash advances are prohibited under both conventional and FHA mortgage guidelines.1Fannie Mae. Borrowed Funds Secured by an Asset2U.S. Department of Housing and Urban Development. HUD 4155.1 Chapter 5 Section B – Acceptable Sources of Borrower Funds The rule exists because lenders want proof your down payment reflects real financial stability rather than another layer of debt stacked on top of the mortgage.
Secured vs. Unsecured: The Line That Matters
Fannie Mae’s Selling Guide and FHA rules both accept borrowed funds for a down payment as long as something you own backs the loan. Acceptable collateral includes savings accounts, certificates of deposit, stocks, bonds, retirement accounts, and real estate.1Fannie Mae. Borrowed Funds Secured by an Asset2U.S. Department of Housing and Urban Development. HUD 4155.1 Chapter 5 Section B – Acceptable Sources of Borrower Funds
Signature loans, credit card advances, and salary advances are off the table. Trying to slip one in before closing rarely works. Underwriters review at least 60 days of bank statements and flag any large deposit that wasn’t already there. A credit refresh shortly before closing will pick up a new liability and prompt a recalculated debt-to-income ratio. Fannie Mae caps that ratio at 50 percent through its automated underwriting system, and manually underwritten loans typically cap at 36 percent (or up to 45 percent with strong compensating factors like high reserves or excellent credit).3Fannie Mae. Debt-to-Income Ratios Add a new personal loan payment on top of a new mortgage payment and most borrowers blow past those limits.
Borrowing From Your 401(k)
A 401(k) loan is the most common way buyers borrow a down payment. Federal tax law caps the loan at the lesser of $50,000 or half your vested balance, with a $10,000 floor.4Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Because you’re borrowing from yourself and paying interest back to your own account, mortgage underwriters generally don’t treat the payment as traditional debt. You’ll need the loan agreement and proof the money hit your bank account.
There’s a built-in advantage for homebuyers. The usual five-year repayment limit on 401(k) loans does not apply when you use the money to buy a primary residence.5Internal Revenue Service. 401(k) Plan Fix-It Guide – Participant Loans Your plan may allow a longer term. The main risk, covered below, is leaving your job before the balance is repaid.
Borrowing Against Life Insurance Cash Value
If you hold a permanent life insurance policy that has built up cash value, you can borrow against that cash value and use the proceeds for a down payment. The policy itself acts as collateral, so the loan qualifies as secured borrowing.2U.S. Department of Housing and Urban Development. HUD 4155.1 Chapter 5 Section B – Acceptable Sources of Borrower Funds Expect to supply the insurer’s loan statement and documentation of the transfer. These loans usually have no required repayment schedule; any balance left unpaid at death reduces the policy’s payout.
Using a HELOC on Property You Already Own
A home equity line of credit secured by a home or other real estate you already own can fund the down payment on your next property. The existing property is the collateral, so it fits the secured-loan rule. Underwriters will check that the HELOC terms don’t conflict with the new mortgage and that the combined loan-to-value ratio on the existing property stays within limits. You’ll provide the HELOC agreement and proof the funds moved into your account.
Piggyback Second Mortgages
A piggyback loan isn’t a loan you take out before applying; it’s a second mortgage closed at the same time as the primary one to shrink the cash you have to bring. In the typical 80/10/10 structure, the first mortgage covers 80 percent of the price, a second loan covers 10 percent, and you put down 10 percent in cash.6Consumer Financial Protection Bureau. What Is a Piggyback Second Mortgage The main appeal is avoiding private mortgage insurance, which is normally required when the first loan exceeds 80 percent of value.
The second mortgage sits as a junior lien, meaning the first lender gets paid before the second in a foreclosure. Because of that added risk, lenders generally want a credit score of around 680 for the second loan, higher than the 620 often accepted on a conventional first mortgage alone. Both loans must be approved together, and the full arrangement appears on your Closing Disclosure.
Loans From Family or Friends
You can borrow a down payment from a relative or friend, but the loan has to be documented and disclosed to your mortgage lender. Where a true gift is confirmed by a signed letter saying no repayment is expected, a private loan requires a promissory note stating the repayment term, interest rate, and monthly payment. The underwriter will fold that payment into your debt-to-income ratio, which reduces how much mortgage you qualify for.
Passing off a loan as a gift to dodge the debt-to-income impact is mortgage fraud. Federal law makes it a crime to submit false statements on a mortgage application.7Office of the Law Revision Counsel. 18 USC 1014 – Loan and Credit Applications Generally; Renewals and Discounts; Crop Insurance Lenders also typically ask the family member for bank statements showing the funds were available, so inconsistencies tend to surface during underwriting or in a later audit.
Interest Rules for Family Loans
If a relative lends you money at a very low rate or no interest, the IRS may treat the forgone interest as a taxable gift from the lender to you. Under the below-market loan rules, the IRS assumes interest was charged at the applicable federal rate (AFR) and that the lender gifted you the difference.8Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates For February 2026, the AFR runs from 3.56 percent on short-term loans to 4.70 percent on long-term loans.9Internal Revenue Service. Section 1274 – Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property A narrow exception exists for total loans of $10,000 or less between the two of you. Most down payment loans sit well above that line, so the safe path is to charge at least the AFR and put the terms in a written note.
If It’s Actually a Gift
When the money is a true gift, the 2026 annual gift tax exclusion lets one person give up to $19,000 per recipient with no gift tax reporting.10Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A married couple can combine for $38,000 to a single buyer. Larger amounts count against the donor’s lifetime exemption but usually don’t produce actual tax owed. Your mortgage lender will still require a signed gift letter confirming no repayment is expected.
Down Payment Assistance Loans
State housing finance agencies and nonprofits offer down payment assistance that’s often structured as a silent second lien on the home. Many carry a zero-percent rate and require no monthly payments; repayment usually kicks in when you sell, refinance, or finish paying off the first mortgage. Assistance amounts typically land in the 3 to 5 percent range of the purchase price, varying by program. Eligibility is normally tied to household income and the price of the home.
Assistance pairs well with low-down-payment loans. FHA loans allow as little as 3.5 percent down for borrowers with credit scores of 580 or higher. Conventional loans backed by Fannie Mae can go as low as 3 percent for first-time buyers.11Fannie Mae. What You Need To Know About Down Payments USDA loans for eligible rural properties often require no down payment at all.12U.S. Department of Agriculture. Single Family Housing Direct Home Loans
Get the Money Into Your Account Early
The stretch between application and closing is the worst time to take on new debt. Lenders watch for undisclosed liabilities right up to closing, and even a modest bump in your debt-to-income ratio can delay or kill the deal. A jump of just three percentage points can be enough to trigger problems.
If you’re using a secured loan like a 401(k) loan or HELOC, move the funds into your bank account as early as you can, ideally at least 60 days before you apply. Funds that have sat for that long are considered seasoned and generally don’t need extra sourcing paperwork. A large deposit that appears mid-underwriting has to be fully explained and documented, which can stall closing.
If You Leave Your Job With a 401(k) Loan Outstanding
Taking a 401(k) loan creates a specific risk worth knowing about before you commit. If you leave your employer, voluntarily or not, while a balance is still owed, the unpaid amount can be treated as a taxable distribution. The IRS calls this a plan loan offset, and it counts as income for the year it happens.13Internal Revenue Service. Plan Loan Offsets Under age 59½, you may also owe a 10 percent early withdrawal penalty on top of the income tax.
You can head off the tax by rolling the offset amount into an IRA or another eligible retirement plan. When the offset results from leaving your job, the IRS gives you until your tax filing deadline for that year, including extensions, to complete the rollover, rather than the usual 60 days.13Internal Revenue Service. Plan Loan Offsets That extra window is often what keeps a job change from turning into a surprise tax bill.