Can U Borrow Money for a Down Payment?

Whether you're looking to buy your first home¹ or invest in a second property, knowing how to borrow money for a down payment can turn your homeownership dreams into reality.

With rising property prices and living costs, it's worthwhile to explore different financing options. Here are five effective ways to borrow money for a down payment on a home:

Home Equity Loan or Line of Credit (HELOC)

If you already own a home, using your existing home equity for a down payment could be a smart move. You have two main options:

• Home Equity Loan: Receive a lump sum you repay over time at a fixed interest rate.
• Home Equity Line of Credit (HELOC): Get flexible access to funds and pay interest only on what you use.

Both options can be beneficial when used wisely. UFCU offers both home equity loans and HELOCs to help you leverage your current property to fund your next move.

Using 401(k) or Retirement Savings for a Down Payment

Some retirement accounts, like a 401(k), allow you to borrow against your retirement savings. While this can provide quick access to funds, it's important to understand what you’re getting into.

• There are real consequences, including potential penalties and tax implications. Consult a professional about your situation before you act.
• A move like this will likely impact your long-term retirement goals, so be sure to take a step back and look at the big picture.

This option is usually recommended as a last resort. It is best for those who can repay the loan quickly or who are comfortable with taking risks.

Bridge Loans for Short-Term Funding

A bridge loan is a short-term loan designed to bridge the gap between buying a new home and selling your current one. Using a bridge loan for a home purchase can be a good option in some situations.

• These loans typically have higher interest rates.
• You’ll need a clear repayment plan.

These loans can be particularly useful for investors or buyers looking to purchase a second property.

Down Payment Assistance Programs

Many states and local governments offer down payment assistance programs to help first-time homebuyers. Down payment assistance can come in many forms:

• Grants
• Forgivable loans
• Low-interest loans

UFCU offers specialized down payment assistance options tailored to meet your needs, making homeownership more accessible.

Using Borrowed or Gifted Funds

A loan from a relative or friend can be a low-interest (or interest-free) option. Just make sure to create a clear understanding of the deal before money changes hands:

• Formalize the agreement to avoid potential conflicts.
• Outline the loan amount, interest rate, and repayment schedule.
• Treat it as a professional, financial arrangement to avoid personal friction.
• Be sure to keep receipts for all funds that move between both parties.

If you're lucky enough to receive gifted funds for your home purchase, it can be a powerful financial boost. Just be sure to follow these key steps to keep your mortgage application on track:

• Know the rules — Each loan type (Conventional, FHA, VA, USDA) has specific guidelines on who can gift money and how it can be used.
• Confirm it’s a true gift — The money must be given with no expectation of repayment.
• Get a gift letter — Your loan officer can help you deliver a (required) signed letter from the donor stating the gift amount and relationship.
• Document the transfer — Provide a clear paper trail showing how and when the funds were transferred.
• Consider tax² implications — Be aware that there may be tax implications for the donor of the gift. donor may need to report the gift to the IRS, depending on the amount.

Why Borrowing for a Down Payment May Be Right for U

Every situation is unique. Whether you’re leveraging your home equity or tapping into your retirement savings, it’s important to choose the method that aligns with your financial goals.

At UFCU, we offer a range of products and services to help you overcome these obstacles:

• Home Equity Line of Credit (HELOC)
• Home Equity Loans
• Down Payment Assistance Programs

We also offer Spanish-speaking loan officers and can service mortgage loans in multiple states, including Arkansas, Colorado, Florida, Georgia, Massachusetts, North Carolina, Ohio, South Carolina, Texas, and Virginia.