Need a Down Payment for a Home Purchase? Don't Even Think of Doing This

Saving your down payment is likely the most expensive step on the road to homeownership.

For many people, the biggest financial hurdle on the way to homeownership is saving up the down payment. It's recommended that home buyers make a 20% down payment on a conventional mortgage loan to avoid having to pay for mortgage insurance and to lessen the chances of ending up underwater on your loan, but this isn't a hard and fast requirement.

With the expenses of everyday life costing more and more, it might be a stretch to save up a down payment in a timely fashion, especially if you want to put down a solid amount of money (which is, generally speaking, a good idea). But are you allowed to borrow money for a down payment?

You usually can't borrow down payment funds

And when I say "borrow," I mean obtain money from a third-party source that must be repaid. This could come in the form of a personal loan, for example, or you might work out a loan from a friend or a family member, with the expectation that you'll then make payments to them. Most mortgage lenders will not accept this method of coming up with a down payment.

When you're buying a home, mortgage lenders dig into your finances to qualify you for a loan. They focus especially hard on your debt-to-income ratio, which makes sense. After all, they're assessing your ability to repay a mortgage loan, and if you have a lot of other debt, it might be difficult for you to keep up with your mortgage payments.

If you're borrowing with a conventional loan, lenders use what's called the 28/36 rule. This rule says that your mortgage payment (which also includes taxes, homeowners insurance, and mortgage insurance, if you're paying it) shouldn't be more than 28% of your income. The "36" part of the rule comes in at the back-end ratio, which is all your debt payments compared to your income, which should be no more than 36% of it. If you're taking on another debt in the form of a personal loan for a down payment, that's going to increase this number, which could give a lender some pause. If you have a lot of debt to pay back, it could impact your ability to repay your mortgage loan.

What's the solution?

Depending on your credit score and the type of mortgage loan you opt for, you might not actually have to put down as much money to buy a home as you may be fearing. Government-backed mortgages have less stringent down payment requirements.

For example, if you're a first-time home buyer with a credit score of at least 580, you might qualify for an FHA mortgage loan, and with this credit profile, you'd only be required to make a down payment of 3.5%. On a $300,000 home loan, that comes out to $10,500, which still isn't a small amount of money, but it might be within reach for you. You'll still have to pay mortgage insurance (in the form of mortgage insurance premiums, also called MIP), but an FHA loan could be a good bet for you to buy a home more easily if you don't have a high income or credit score.

Another option is to use gift funds for your down payment, if you have anyone in your life who would be willing to be this generous. You have to be careful in this instance too, as your mortgage lender will need to see where that money came from and reassurance that it was truly a gift, and not a loan that must be paid back. You'll have to supply a dated down payment gift letter, explaining the source of the money, as well as evidence that it was transferred from that person to you (such as a canceled check after the deposit is made to your account).

If you're dreaming of homeownership, getting over the down payment hurdle could be the most difficult part of the process for you. If you can qualify for a government-backed mortgage, you could get away with making a smaller down payment, and if you have a generous family member who wants to help you buy a home, that could also be a solution.