Coming up with a down payment is typically one of the biggest challenges for first-time homebuyers. But it’s not just the amount that buyers need. Where the money comes from is equally important.
Lenders need to make sure that a borrower’s down payment funds do not create additional risk—which means that not all sources of money are allowed. Let’s dive into some examples.
Borrowed Money
In most cases, lenders will not let you use money from a personal loan, a credit card, or a loan from a friend for a down payment. The reason is simple: taking on unsecured debt increases your monthly obligations, which can make it harder for you to make your mortgage payment.
In some situations, loans that are secured by an asset—such as a home equity loan or a bridge loan—may be acceptable.
If you’re considering any type of borrowed funds for your down payment, it’s a good idea to talk with a loan expert early so you understand what is allowed before moving forward. Otherwise, the safest approach is to plan on using your own savings.
Undocumented Funds
Do you have cash stuffed under a mattress at home? Even if the money is yours, if your lender can’t verify where it came from or how long you’ve had it, it can’t be used toward your down payment.
The same goes for large cash deposits in your bank account. When you apply for a mortgage, a lender will review your bank statements from the past three months. If, for example, you deposit $8,000 into your account a few weeks before applying, your lender will need to know where the money came from.
What if you sold your car, or you came home from Vegas with a stack of cash? You can use those funds—so long as they can be verified. That means providing your lender with a bill of sale for the car or a payout statement from a casino, and having a record of the funds deposited into your bank account.
Gifts from family members are often allowed, but they still need to follow clear rules. The person providing the funds must provide a signed letter—otherwise known as a gift letter—that states the money does not need to be repaid. (You can learn more about gift letters here.)
Restricted Sources
Let’s say you found your dream home, and while you don’t have much savings, the seller is willing to help with your down payment. Can they?
Unfortunately, no. The same applies to real estate agents, builders, or other parties who stand to benefit from the sale, because it could create a conflict of interest.
Lenders base their loans on a home’s true market value. If a seller was allowed to fund your down payment, they might be inclined to raise the purchase price to cover that cost. This can make the home appear more valuable than it really is, which increases the risk for the lender.
That said, the seller may be able to pay for some of your closing costs, depending on the loan program you choose. But those funds cannot be used for the down payment.
How These Rules Protect You
The takeaway is that the source of your down payment funds needs to be transparent, documented, and structured in a way that meets your lender’s guidelines. While these requirements may feel strict, they also protect you as the buyer.
Borrowing cash for your down payment can make it harder to manage your monthly payment and create financial stress. By requiring clear documentation and limiting certain types of funds, your lender is making sure your mortgage is something you can manage over time—not something that puts you in a difficult position later.
Still have questions about down payment sources? The local loan experts at Right By You Mortgage are happy to help. Find a local mortgage loan officer to get started or email us at inquiries@rightbyyoumortgage.com.
