You can use a loan for a down payment on a house, but only if that loan is secured by something you already own, such as a retirement account, a life insurance policy with cash value, or existing real estate. Unsecured personal loans and credit card cash advances are off the table under both conventional and FHA rules. Lenders draw the line here because a secured loan shows you’re drawing on real wealth you’ve built, while an unsecured one just piles new debt onto the mortgage they’re about to give you.
Borrowed Funds That Lenders Will Accept
Fannie Mae’s Selling Guide and FHA guidelines both allow borrowed down payment money when it’s backed by the borrower’s own assets. Fannie Mae specifically lists savings accounts, certificates of deposit, stocks, bonds, 401(k) accounts, real estate, and even automobiles or collectibles as acceptable collateral.1Fannie Mae. Borrowed Funds Secured by an Asset FHA follows the same logic, permitting loans secured by investment accounts, real estate other than the home you’re buying, or deposited funds like CDs.2U.S. Department of Housing and Urban Development. HUD 4155.1 Chapter 5 Section B – Acceptable Sources of Borrower Funds If you can point to something you own that backs the money, the funds will usually clear underwriting.
401(k) Loans
Borrowing from your 401(k) is one of the most common ways to fund a down payment. Federal tax law caps these loans at the lesser of $50,000 or half your vested balance, with a floor of $10,000.3Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Because you’re borrowing your own money and paying interest back to yourself, mortgage underwriters typically don’t treat it as ordinary debt. Expect to hand over the loan agreement and proof the funds landed in your checking or savings account.
One advantage for buyers: the usual five-year repayment cap for 401(k) loans does not apply when the money goes toward buying your primary home.4Internal Revenue Service. 401(k) Plan Fix-It Guide – Participant Loans Your specific plan sets the actual term.
Life Insurance Policy Loans
If you carry a permanent life insurance policy with accumulated cash value, you can borrow against it. The cash value serves as collateral, which puts the loan inside the secured-borrowing lane under both conventional and FHA rules.2U.S. Department of Housing and Urban Development. HUD 4155.1 Chapter 5 Section B – Acceptable Sources of Borrower Funds You’ll usually provide the insurer’s loan statement and evidence of the transfer. There’s typically no mandatory repayment schedule; any unpaid balance simply reduces the death benefit.
HELOC on Property You Already Own
If you already own real estate, a home equity line of credit on that property can fund the down payment on the new one. The existing property secures the loan. The underwriter will confirm the HELOC terms don’t conflict with the new mortgage and that the combined loan-to-value on your existing property stays within limits. You’ll need the HELOC agreement and documentation showing the funds moved into your account.
Borrowed Funds That Are Not Allowed
Unsecured personal loans — the kind backed by nothing but your signature — are prohibited as a down payment source under both conventional and FHA rules.1Fannie Mae. Borrowed Funds Secured by an Asset Credit card cash advances and salary advances fall in the same bucket.2U.S. Department of Housing and Urban Development. HUD 4155.1 Chapter 5 Section B – Acceptable Sources of Borrower Funds The reasoning: if the down payment itself is borrowed with no collateral, you have no real equity in the property from day one, and the total debt load may not be sustainable.
Trying to slip an unsecured loan past the lender rarely works. Underwriters review at least 60 days of bank statements and flag large deposits that weren’t already there. Any new liability that appears when your credit is refreshed before closing forces a recalculation of your debt-to-income ratio, and Fannie Mae caps that ratio at 50 percent for loans run through automated underwriting.5Fannie Mae. Debt-to-Income Ratios A fresh personal loan payment on top of a new mortgage payment often pushes borrowers past that line.
Piggyback Second Mortgages
A piggyback loan is a second mortgage taken out at the same time as your primary loan to shrink or replace the cash down payment. In the classic 80/10/10, the primary mortgage covers 80 percent of the purchase price, a second loan covers 10 percent, and you bring 10 percent cash.6Consumer Financial Protection Bureau. What Is a Piggyback Second Mortgage The structure lets buyers avoid private mortgage insurance, which is usually required when the first mortgage exceeds 80 percent of the home’s value.
The second mortgage is recorded as a junior lien, meaning the primary lender gets paid first if the property is foreclosed on. Because of that added risk, lenders often want a credit score around 680 for the second loan. The second loan carries its own rate and closing costs, and both mortgages are approved together, with the full arrangement disclosed on your Closing Disclosure.
Loans From Family or Friends
You can borrow the down payment from a family member or friend, but the loan has to be documented and disclosed. A private loan is not a gift: it requires a promissory note laying out the repayment term, interest rate, and payment amount. The underwriter will fold that monthly payment into your debt-to-income ratio, which lowers the mortgage you can qualify for.
Do not label it a gift to avoid the DTI hit. Federal law makes it a crime to submit false statements on a mortgage application, with penalties reaching fines of up to $1,000,000, imprisonment of up to 30 years, or both.7Office of the Law Revision Counsel. 18 USC 1014 – Loan and Credit Applications Generally; Renewals and Discounts; Crop Insurance Lenders typically ask the family member for bank statements proving the funds were available, so mismatches between a gift letter and later repayment activity tend to surface.
Imputed Interest on Below-Market Family Loans
If a relative lends you money at little or no interest, the IRS may treat the forgone interest as a taxable gift from the lender to you. Under federal tax law, a below-market loan between individuals triggers imputed interest at the applicable federal rate, and the IRS treats the difference as a gift. There’s a narrow exception when total outstanding loans between the two of you stay at or below $10,000, but a down payment loan will typically be well above that.8Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates Charge at least the applicable federal rate and put it in writing.
What Changes if It’s Actually a Gift
If the family member wants to give you the money outright, the 2026 annual gift tax exclusion lets an individual give up to $19,000 per recipient with no gift tax reporting; a married couple could give $38,000 to a single buyer.9Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Amounts above the exclusion count against the donor’s lifetime exemption but don’t necessarily produce tax owed. Your lender will require a signed gift letter confirming no repayment obligation exists.
Down Payment Assistance Loans
Many state housing finance agencies and nonprofits offer down payment assistance through structured loans, often recorded as a silent second lien on the property. These loans frequently carry a zero-percent rate with no monthly payments, and repayment is triggered when you sell, refinance, or finish paying off the first mortgage. Assistance amounts generally fall around 3 to 5 percent of the purchase price, though it varies by program.
Eligibility is usually tied to household income and home price. Assistance loans are often paired with low-down-payment mortgages: FHA loans allow as little as 3.5 percent down with a credit score of 580 or higher, and Fannie Mae–backed conventional loans can go as low as 3 percent for first-time buyers.10Fannie Mae. What You Need To Know About Down Payments USDA loans for eligible rural properties often require nothing down.11U.S. Department of Agriculture. Single Family Housing Direct Home Loans
Get Borrowed Funds Into Your Account Early
The stretch between application and closing is the wrong time to take on new debt of any kind. Lenders monitor for undisclosed liabilities up to the closing date, and even a modest jump in your debt-to-income ratio can delay or block the loan.
If you plan to use a secured loan such as a 401(k) loan or HELOC, get the money into your bank account as early as you can, ideally at least 60 days before you apply. Funds that have sat in the account that long are “seasoned” and generally don’t require extra sourcing paperwork. Deposits that appear during underwriting have to be explained and documented, which slows everything down.
One Tax Risk to Plan For
If you take a 401(k) loan and then leave your job before it’s repaid, whether by choice or a layoff, the outstanding balance may be treated as a taxable distribution. The IRS calls this a plan loan offset, and it counts as income in the year it happens.12Internal Revenue Service. Plan Loan Offsets If you’re under 59½, add a 10 percent early withdrawal penalty on top.
You can avoid the tax hit by rolling the offset amount into an IRA or another eligible retirement plan. When the offset is caused by leaving your employer, the IRS gives you until your tax filing deadline for that year, including extensions, to complete the rollover rather than the standard 60 days.12Internal Revenue Service. Plan Loan Offsets That extra window is often the difference between a manageable situation and an unexpected tax bill.