Is it possible to take a loan for a down payment?

Is it possible to take a loan for a down payment?

Technically, yes—but with some conditions.

A secured loan is acceptable for a down payment. A borrower can refinance their primary residence or get a HELOC for the down payment on an investment property or second home. That’s totally legit. The lender will incorporate the payment for the new loan into the borrower’s debt to income ratio.

An unsecured loan is not acceptable. A credit card cash advance or personal loan falls into this category.

But.

Lenders will verify a borrower’s funds by collecting two months’ complete bank statements. They’ll require explanation and documentation of any large deposits. “Large” is defined as any single deposit or several over a short time that is more than 50% of the borrower’s qualifying income. Payroll deposits, tax refunds and such are exempt from this rule.

There is a workaround. A borrower could get a personal loan for $20,000 on March 25 and deposit it in the bank. Three months later, they could provide statements for April and May. The large deposit would not appear, and the lender would not ask for further documentation.

By that time, the loan and its payment will show up on the credit report. They will have to qualify with the additional payment.

I’ve just given a technically correct answer. In the real world, borrowing money this way for a down payment is a very risky strategy. Unsecured loans are costly, for one thing. A borrower with no other cash reserves, borrowing the maximum amount the lender will allow, is on the ragged edge. It would take a tiny emergency to push them into financial straits.

The minimum down payment for a conventional loan is 3%. Some landlords expect nearly that much as an initial payment before allowing a new tenant to move in. If someone has been unable to save that much to buy a home, they should look carefully at their finances and financial habits before trying to move forward.

Many states and communities offer low-cost (or zero interest, zero payment) loans for first-time buyers of modest means. Look to those first before trying to borrow expensive money for a down payment and closing costs. Most down payment assistance programs (DPA) require at least some money from the borrower, but the amount is reduced. Search “down payment assistance” and the name of your city to see what’s available.