What is a down payment loan?

Having the necessary funds for the down payment when purchasing a home and getting a mortgage can be a big hurdle for many buyers who have everything else covered. If you do not have the funds currently there are a few options that might be of help.
The first option is what is commonly called an 80/20 Loan. With this method there are two loans, one of which is the 80% that covers the traditional home loan and the second loan which is a line of credit which covers the 20% down payment that you would otherwise be required to come up with yourself for the down payment.
Another option is to loan yourself money through your retirement plan, whether it is a 401k or IRA. With your 401k you can borrow up to $50,000 (or half of your balance, whichever is greater) and repay yourself in regular payments over up to a five year period. With a Roth IRA you can withdraw your contributions at any time and earnings up to $10,000 after five years without any taxes or penalties as long as the funds are used within 120 days. With a Traditional IRA you can again withdraw up to $10,000 without penalties as long as it is done within the 120 days, but you will need to pay income tax on the amount as what you have contributed has not been taxed yet whereas with the Roth it would have already been taxed.
Finally, while not a loan but something which might be a viable alternative for some is a gift. Gifts are allowed as part of a down payment and can be given in amounts up to a maximum of $13,000 to help with the down payment. As this must be a gift it can not be a repayable loan.

Generally, when you buy a home, you are expected to make a down payment. Your down payment reduces the amount that you borrow, and helps you start out with equity in your home. However, in some cases it is difficult to come up with the money you need for a down payment. The good news is that, in some cases, it’s possible to get help from your lender.

80/20 Loans

Prior to the financial crisis 2008, one of the common types of down payment loans was the 80/20 loan. Basically, the lender gives you a loan of 20% of the purchase price, and that serves as the “down payment.” The remaining 80% is then borrowed as well. The smaller loan, though, has a higher interest rate attached to it.

The main advantage to the 80/20 loan is that it provides you with a way to avoid Private Mortgage Insurance, since you are technically putting a 20% down payment on your home. It’s possible to find lenders that offer 80/20 loans, but they are less prevalent in the past.

FHA Down Payment Loan

You can also receive a loan to help meet your down payment requirement for a FHA loan. While the down payment is smaller with a FHA loan, you will still have to pay the FHA insurance if you don’t have a large enough down payment.

Friends and Family Down Payment Loan

While a lender can provide you with a down payment loan, a friend or relative usually cannot. Most lenders will not want you to use a loan from another source as your down payment. With a mortgage loan, it’s possible for you to accept a true gift from a relative for your down payment, but you can’t plan to pay it back. Many lenders require you and the donor to sign paperwork affirming that the money is the true gift.