While it is technically possible to get a loan for the down payment on a home it can create some significant challenges when you apply for a mortgage so there are many points to consider, which we explain in detail below. When you take all of these points into account, you can understand why most people do not get a loan for their down payment to buy a home.
The first point to keep in mind is that you are required to disclose all loans and debts you are responsible for when you apply for a mortgage, including any loans from a relative or friend that may not show up on your credit report. The lender reviews the terms for all loans to understand the required payment and any collateral used for the loan.
If the property you are buying is used to secure a down payment loan then the lender may not permit loan and will definitely not allow the loan if it takes priority over your mortgage. Loan priority reflects the order in which the loans are recorded as well as when you are required to repay your loans and claims on the property in the event of a default. In short, lenders require that their mortgage has first priority so they get repaid first.
Use ourDOWN PAYMENT CALCULATORto determine how much you need to put down to buy a home
Lenders may permit a down payment loan if it is junior, or second in priority, to the mortgage but only if the total combined loan amount does not exceed the lender’s maximum loan-to-value (LTV) ratio. The LTV ratio effectively limits the total amount of loans secured by a property relative to the value of the property.
Lenders usually apply a maximum LTV ratio of 75% to 97%, with 80% being the standard ratio, depending on the loan program and other factors. The lender uses an LTV ratio limit to help ensure that they recover their loan if you cannot repay the mortgage.
For example, if you want to buy a home for $100,000 and you obtain a mortgage for $80,000 (80%) and a take out a down payment loan for the remaining $20,000 (20%), your LTV ratio is 100%, which likely exceeds the lender’s LTV ratio limit and prevents you from qualifying for the mortgage. It is important to understand the maximum LTV ratio for your specific lender and loan program before you apply for the mortgage.
The final point to understand about a down payment loan is that any monthly payments you are required to make are included in your debt-to-income ratio which impacts what size mortgage you qualify for. The higher your monthly debt expense, the lower the mortgage amount you can afford. So if the monthly payments for the loan plus your other debts such as credit cards and car, personal and student loans are too high, you may not get approved for the mortgage you want.
It is important to highlight that there are alternatives to paying for your down payment besides getting a loan including home buyer assistance programs and grants. These programs can help you pay for part or all of the down payment to buy a home and are implemented with the full cooperation and coordination of your lender.
Review How Down Payment Assistance Programs Work
There are also numerous no and low down payment mortgage programs that minimize or eliminate the need for a down payment loan. In some cases you can combine a down payment grant with a low down payment program to buy a home with minimal personal financial contribution.
These programs are usually a much simpler and more cost-effective way to help you pay for the down payment to buy a home than a loan from a friend, relative or other source.
Review Best Low Down Payment Mortgage Programs
The table below shows mortgage terms for leading lenders in your area. We recommend that you contact multiple lenders to confirm their down payment requirements. Shopping lenders also enables you to find the lender and mortgage that are right for you.
"B3-4.3-15, Borrowed Funds Secured by an Asset." Selling Guide: Fannie Mae Single Family. Fannie Mae, October 30 2009. Web.