Can I Use a Home Equity Loan for a Down Payment on Another House

To assist you in your planning, below is a table that provides examples of down payment amounts by home size and the percentage you might need to put down on a home.

Down payment guide

Home price	5% down	10% down	15% down	20% down
$200,000	$10,000	$20,000	$30,000	$40,000
$300,000	$15,000	$30,000	$45,000	$60,000
$400,000	$20,000	$40,000	$60,000	$80,000
$500,000	$25,000	$50,000	$75,000	$100,000
$600,000	$30,000	$60,000	$90,000	$120,000
$700,000	$35,000	$70,000	$105,000	$140,000
$800,000	$40,000	$80,000	$120,000	$160,000
$900,000	$45,000	$90,000	$135,000	$180,000
$1,000,000	$50,000	$100,000	$150,000	$200,000
$1,500,000	$75,000	$150,000	$225,000	$300,000

Remember that lenders may have additional requirements or limits based on market conditions and your financial situation. It’s also wise to leave some equity in your home for future flexibility and to avoid over-leveraging your property.

How to use an equity-backed loan as a down payment

When you’re considering using your home equity to help fund a down payment on another property, there are two primary equity-backed loan options: a home equity loan and a home equity line of credit (HELOC). Both can be viable, depending on your specific needs, financial situation, and preferences. Here’s a breakdown of each option to help you determine which one may work best for you.

Home equity loan as a down payment

A home equity loan allows you to borrow a lump sum of money, using the equity in your current home as collateral. This type of loan is a second mortgage with a fixed interest rate and a set repayment schedule. Because you receive the money all at once, it can be a good option if you know exactly how much you need for your down payment.

A home equity loan may be a good option if you:

• Need a large lump sum of money upfront
• Only need the money once for a single purpose
• Prefer a fixed interest rate and fixed payments
• Want a faster or clearer repayment path

HELOC as a down payment

A home equity line of credit (HELOC) works differently from a home equity loan. Instead of receiving a lump sum, you gain access to a revolving line of credit that you can borrow from as needed, similar to a credit card. With a HELOC, you can draw funds over a specified period (often 10 years), and payments are typically interest-only during the draw period. The interest rate on a HELOC is variable, which can affect your payments over time.

A HELOC may be a good option if you:

• Need to access money repeatedly over time
• Want more flexible borrowing and repayment options
• Would benefit from a longer draw period
• Are comfortable with a HELOC’s variable interest rate

Risks of using a home equity loan for a down payment

It’s important to weigh the risks before committing to using a home equity loan for a down payment.

• Risk of foreclosure: Borrowing against your home means you’re putting your property at risk. If you can’t make the payments, you could potentially lose your home.
• Two mortgage payments: You’ll be responsible for both your existing mortgage and the home equity loan, which could strain your monthly budget.
• Reduced future equity: By tapping into your home’s equity, you reduce the amount of equity available for future use or for resale value.

What’s required to get a home equity loan?

To qualify for a home equity loan, lenders typically require you to meet several key criteria. Each lender may have slightly different guidelines, but here are some general requirements you can expect:

• Sufficient equity: Most lenders require that you maintain at least 15% to 20% of equity in your home after borrowing.
• Good credit score: A credit score of 620 or higher is often required, but higher scores may qualify you for better interest rates.
• Acceptable debt-to-income ratio (DTI): Lenders usually want to see a DTI of 43% or lower. This means your monthly debt payments, including the new loan, should not exceed 43% of your income.
• Stable, verifiable income: You’ll need to provide pay stubs, tax returns, or other proof of reliable income to demonstrate your ability to repay the loan.
• A qualifying home appraisal: An appraisal is typically required to determine your home’s current market value, which helps the lender calculate your loan amount.

Plan ahead to use a home equity loan for a down payment

According to HomeLight’s 2024 Lender Insights survey, most borrowers receive their home equity funds within 15 to 30 days. Here are a few steps to be ready to apply and keep on the right track:

1. Evaluate your home’s equity: Start by getting an estimate of your home’s value and calculate how much equity you could tap into for a loan.

2. Check your credit: Review your credit report and score to ensure you meet lender requirements. If your score needs improvement, consider paying down debt or disputing any errors on your report.

3. Budget for two loans: Before applying, run the numbers to ensure you can afford the monthly payments for both your existing mortgage and the home equity loan.

4. Shop around for lenders: Different lenders offer different terms, so it’s worth comparing rates and fees from multiple sources to find the best deal.

5. Consider timing: The loan approval process takes time, so start the application well in advance of needing the funds for your down payment.

Alternatives to using a home equity loan for a down payment

While using a home equity loan is one way to fund a down payment, you have other options to explore depending on your financial situation and homebuying goals:

• Retirement funds: You may be able to tap into your 401(k) or IRA for a down payment. Just be sure to consult with a financial advisor, as early withdrawals can come with penalties and tax implications.
• Other savings or investments: If you have sufficient savings or liquid investments, you might consider using those instead of borrowing against your home’s equity.
• Gift funds: If you have family members willing to help, many lenders allow you to use gift funds for a down payment, provided you document the source and confirm it’s a gift, not a loan.
• Cash-out refinance: Refinancing your current mortgage and taking out a portion of your home’s equity as cash can be an alternative to a home equity loan, often offering better rates.
• Personal loans: Unsecured personal loans can be used for a down payment, though they tend to have higher interest rates than equity-backed options.
• Seller financing: In some cases, the seller may be willing to finance the sale directly. This option can benefit buyers who may have difficulty qualifying for traditional loans.
• Reverse mortgage: If you’re 62 or older, a reverse mortgage allows you to access your home’s equity without immediate repayment, which can be useful for a down payment on a new home. Keep in mind this will reduce the equity in your existing home.
• Home equity investment: Some companies offer equity-sharing agreements, where they invest in your home in exchange for a share of future appreciation. This option can be beneficial for those who need funds but want to avoid taking on additional debt.
• Bridge loan: If your objective is to buy before you sell, this short-term loan can act as a bridge. Once your home sells, the loan is paid off. But as noted above, you may be better off using a more modern buy before you sell program.

Investor-specific alternatives:

• Hard money loans: Often used by real estate investors, hard money loans are short-term, asset-based loans that provide quick financing but come with higher interest rates.
• Peer-to-peer lending: This option allows you to borrow funds from individuals or groups online, bypassing traditional banks. It’s popular among investors looking for income properties but may come with variable terms.

Should you use a home equity loan for a down payment?

Using a home equity loan for a down payment can be a strategic move if you have significant equity in your home and are comfortable managing two loan payments. However, it’s not a one-size-fits-all solution. The right choice depends on your financial situation, goals, and risk tolerance.

Whether you’re buying an investment property, a vacation home, or a new primary residence, it’s important to explore all your financing options before making a decision. Consulting a financial advisor or mortgage expert can help you weigh the pros and cons.

If you’re ready to buy, sell, or both, connect with a top real estate agent through HomeLight’s free Agent Match platform. The right agent can help you navigate the market and find the best opportunities for your next home sale or purchase.

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