You can borrow money for closing costs, but not in the way most buyers first imagine. Personal loans and credit card advances are off the table for nearly every major mortgage program. What lenders do accept is a set of alternatives that let you finance those fees indirectly: seller credits built into the purchase price, lender credits paid for with a higher interest rate, gift funds from family, a loan against your 401(k), or a deferred-payment second mortgage through a down payment assistance program. Closing costs typically run 2% to 5% of the sale price, so the choice matters.
What You Cannot Use: Personal Loans and Credit Card Advances
Start here because the assumption trips up a lot of first-time buyers. Fannie Mae’s guidelines state that personal unsecured loans, including signature loans, credit card lines of credit, and overdraft protection, are not an acceptable source of funds for down payment, closing costs, or reserves on a conventional loan.1Fannie Mae. Personal Unsecured Loans
FHA takes the same position. Its Single Family Housing Policy Handbook lists unsecured signature loans, credit card cash advances, and borrowing against household goods as unacceptable sources of borrowed funds when they come from the seller, agent, lender, or another interested party.2HUD.gov. FHA Single Family Housing Policy Handbook If an underwriter traces your closing funds to one of these sources, the loan can be denied. Portfolio and non-qualified mortgage lenders sometimes write their own rules, but that is a small slice of the market. For a conventional, FHA, VA, or USDA loan, plan on one of the routes below.
Seller Concessions
The simplest way to keep cash in your pocket is to ask the seller to cover your closing costs as part of the purchase contract. The seller credits a set dollar amount toward your fees at closing, and the price is usually nudged up to reflect it. On a $350,000 home, that might look like a $360,000 contract price with a $10,000 seller credit at settlement. You are effectively financing the costs over the life of the mortgage.
Each loan program caps how much the seller can contribute:
- FHA loans allow up to 6% of the sale price toward closing costs, prepaid items, and discount points. Contributions above your actual costs reduce the property’s adjusted value dollar for dollar.3U.S. Department of Housing and Urban Development. What Costs Can a Seller or Other Interested Party Pay on Behalf of the Borrower
- VA loans cap seller concessions at 4% of the home’s reasonable value, which includes credits toward the VA funding fee and debt payoff.4Veterans Affairs. VA Funding Fee and Loan Closing Costs
- USDA loans allow seller contributions up to 6% of the sale price for eligible loan purposes.5Rural Development – USDA. HB-1-3555 Chapter 6 – Loan Purposes
- Conventional loans scale the cap to your down payment on a primary residence: 3% with less than 10% down, 6% between 10% and 25%, and 9% at 25% or more.
Two catches. The home has to appraise at or above the higher contract price, or you will need to cover the gap or renegotiate. And the credit can never exceed your actual closing costs. Any surplus goes back to the seller or reduces the loan balance.
Lender Credits
Your lender can pay some or all of your closing costs in exchange for a higher interest rate. Instead of writing a check at settlement, you spread the cost across every monthly payment for the life of the loan. A common trade might be 7.0% with a $5,000 credit versus 6.5% with no credit.6Consumer Financial Protection Bureau. How Should I Use Lender Credits and Points
The principal you borrow does not change. What changes is the total interest you pay. Lender credits work best if you expect to sell or refinance in a few years, before the rate premium overtakes what you saved at closing. Hold the mortgage 30 years and you will almost certainly pay more than the upfront costs would have been. The credit is locked in when you lock your rate, appears on page two of the Closing Disclosure, and cannot exceed your actual settlement charges.7Consumer Financial Protection Bureau. Closing Disclosure
Gift Funds From Family
Money given by relatives or people with a close personal relationship to you is an accepted source of funds. Fannie Mae recognizes donors related by blood, marriage, adoption, or legal guardianship, along with domestic partners, fiancés, former relatives, and individuals with a long-standing familial or mentorship relationship with you. The donor cannot be the builder, developer, real estate agent, or anyone else with a financial interest in the sale.8Fannie Mae. Personal Gifts
On a one-unit primary residence, all of your funds can come from a gift, with no minimum contribution required from your own savings. If you are buying a two- to four-unit property or a second home with more than 80% financing, you need to put in at least 5% from your own money before gift funds fill the rest.8Fannie Mae. Personal Gifts
Expect to provide a signed gift letter listing the dollar amount, the donor’s name and relationship to you, and a statement that no repayment is expected. Your lender will also want documentation that the donor had the funds: a copy of the donor’s withdrawal or check paired with your deposit, or evidence of an electronic transfer. If the gift is delivered at the closing table, it has to arrive as a certified check, cashier’s check, or wire transfer to the closing agent.8Fannie Mae. Personal Gifts
401(k) or 403(b) Plan Loans
This is the closest thing to genuine borrowing on the approved list. If your employer’s plan permits loans, federal law caps the amount at the lesser of $50,000 or half your vested balance, with a minimum available loan of $10,000. General-purpose plan loans have to be repaid within five years, but a loan used to buy a primary residence can be extended beyond that.9Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities, Certain Proceeds of Endowment and Life Insurance Contracts – Section: Loans Treated as Distributions
Because you pay the interest back into your own account, most mortgage underwriters do not treat the repayment as debt when calculating your debt-to-income ratio. That is unusual, and it makes plan loans one of the few borrowing options that will not hurt qualification. Your lender will want the plan’s loan terms and proof of your remaining balance after the draw.
The real risk is leaving your job. Your plan can require full repayment on separation, and if you cannot pay, the outstanding balance is treated as a taxable distribution. If you are under 59½, you may also owe a 10% early withdrawal penalty. You can head off the immediate tax hit by rolling the outstanding balance into an IRA or another eligible plan by the due date of that year’s federal tax return.10Internal Revenue Service. Retirement Topics – Loans
IRA 60-Day Rollover
IRAs do not offer loans, but there is a short-term workaround some buyers use: withdraw funds, then redeposit the full amount into an IRA within 60 days. Do it right and the IRS treats the move as a rollover rather than a distribution.11Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
Miss the 60-day window for any reason and the full amount becomes taxable income, plus a possible 10% early distribution penalty. You are limited to one IRA-to-IRA rollover in any 12-month period. And if the plan withholds taxes from the distribution, you have to replace the withheld amount from other cash to complete the rollover in full. Withhold $2,000 from a $10,000 distribution and you need to come up with $2,000 elsewhere, or that portion is taxed as a distribution.11Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
Down Payment Assistance Programs
State and local housing agencies often help with closing costs through a silent second mortgage: a second lien on the property, usually at 0% interest with no monthly payment. Repayment is deferred until you sell the home, refinance, or pay off the primary mortgage. Because nothing comes out of your budget each month, these programs do not add to your housing cost while you live there.
Eligibility varies. Most programs impose household income limits tied to area median income, and many require a homebuyer education course before closing. Your primary lender has to review and approve the subordinate lien to confirm it fits their secondary financing guidelines. One item to remember for later: if you received a federally subsidized mortgage through the program and sell within a set period, you may owe a federal recapture tax reported on IRS Form 8828.12Internal Revenue Service. About Form 8828 – Recapture of Federal Mortgage Subsidy
How These Choices Affect Qualification
Your lender will measure your debt-to-income ratio, the share of your gross monthly income that goes to debt payments. For conventional loans underwritten through Fannie Mae’s automated system, the ceiling is 50%. Manually underwritten loans typically fall between 36% and 45% depending on credit and reserves.13Fannie Mae. Debt-to-Income Ratios
Seller concessions, lender credits, and gift funds add no monthly payment, so they leave your ratio alone. Retirement plan loan payments generally are not counted, because they go back into your own account. Deferred-payment assistance programs do not raise your monthly obligations either. That is why these routes work when a personal loan or a card advance would not: even if the mortgage program allowed the borrowing, the new payment would eat into the same DTI budget your mortgage needs to fit inside.