Yes, you can use home equity as a down payment, but the money has to move through a loan first

You cannot hand a lender equity directly. Instead, you borrow against your home's equity through a home equity loan or home equity line of credit (HELOC), receive cash, and then use that cash as your down payment on the new property. The lender approves the new mortgage knowing you borrowed the down payment money—they will ask where the funds came from, and you must document the source.

This works because home equity is real value you own. If your home is worth $400,000 and you owe $250,000 on the mortgage, you have $150,000 in equity. A lender will let you borrow against some or all of that equity, typically up to 80 to 90 percent of your home's total value minus what you still owe.

The catch: you now have two loans. Your original mortgage stays in place, and you add a second loan on top of it. If you cannot pay either one, you risk losing your home. Lenders know this, so they charge higher interest rates on home equity loans than on primary mortgages, and the approval process takes longer because they are assessing your ability to carry both debts.

Key Takeaways

  • Home equity loans and HELOCs let you borrow cash against your home's value, which you can then use as a down payment on a new property.
  • Lenders will ask for documentation proving where your down payment came from, so you must show the home equity loan paperwork and bank statements.
  • Using home equity means carrying two mortgages or a mortgage plus a second loan, which increases your total monthly debt and your risk if income drops.
  • Interest rates on home equity loans are typically higher than primary mortgage rates, and approval can take two to four weeks.
  • Some lenders will not approve a new mortgage if your total debt-to-income ratio becomes too high after adding the home equity loan payment.

How home equity loans and HELOCs work as down payment sources

A home equity loan is a lump sum. You borrow a fixed amount—say $50,000—receive it all at once, and repay it over a set term (usually 5 to 15 years) at a fixed interest rate. You make one monthly payment. This is straightforward if you know exactly how much down payment you need.

A HELOC works more like a credit card. The lender approves a credit limit based on your equity—say $100,000—and you draw from it as you need it. You pay interest only on what you actually borrow. HELOCs often have variable interest rates, meaning your payment can change. They are useful if you are not sure how much you will need, but they add complexity because your payment is not fixed.

For a down payment, most people choose a home equity loan because the amount is known and the payment is predictable. You close the loan, receive the funds in your bank account, and then use that money when you make an offer or close on the new home.

What lenders will ask about the source of your down payment

When you apply for a mortgage on the new property, the lender will ask where your down payment is coming from. This is standard. They want to know you are not borrowing the down payment from someone else (which would increase your debt without their knowledge) and that the funds are genuinely yours.

You will need to provide bank statements showing the money in your account, plus documentation of the home equity loan or HELOC. The lender will verify that the funds came from your own borrowing against your own home, not from a personal loan, credit card, or a gift that you are expected to repay. If the money came from a gift, some lenders require a signed letter from the gift-giver stating it does not need to be repaid.

The approval process for the new mortgage may take longer because the lender has to confirm the home equity loan is real, that it is in your name, and that you can handle both payments. This typically adds one to two weeks to the timeline.

The cost of using home equity: interest rates and fees

Home equity loans and HELOCs cost more than primary mortgages. A primary mortgage might carry an interest rate of 6 to 7 percent (rates vary by market and your credit). A home equity loan typically runs 8 to 12 percent, depending on your credit score, the lender, and how much equity you are borrowing against.

On a $50,000 home equity loan at 10 percent over 10 years, your monthly payment is roughly $530. Over the life of the loan, you pay about $13,000 in interest alone. If you are using this to fund a $50,000 down payment, that interest is a real cost of the transaction.

You may also pay origination fees (typically 1 to 5 percent of the loan amount), appraisal fees ($300 to $600), and title search fees. These add up quickly. A $50,000 loan with a 3 percent origination fee costs $1,500 before you even borrow the money.

How this affects your ability to get approved for the new mortgage

Lenders use a metric called debt-to-income ratio to decide whether to approve you. This is the total of all your monthly debt payments divided by your gross monthly income. Most lenders want this ratio to be 43 percent or lower, though some will go to 50 percent for strong borrowers.

When you add a home equity loan payment on top of your existing mortgage, car loans, credit cards, and student loans, your debt-to-income ratio goes up. If you are already close to the limit, the home equity loan payment might push you over it, and the lender will deny the new mortgage.

For example: if you earn $5,000 per month and your current debts total $2,000 per month (40 percent), adding a $530 home equity loan payment brings you to $2,530 (50.6 percent). Some lenders will still approve you; others will not. You need to know your own ratio before you borrow.

Timing: when to get the home equity loan relative to the new mortgage

The order matters. You should get the home equity loan before you apply for the new mortgage, so the funds are already in your bank account when you submit the application. This shows the lender the money is real and available.

However, do not close on the home equity loan too far in advance. If you borrow the money three months before you buy the new home, the lender will see a large cash balance in your account and may ask where it came from. You will have to explain that it is from a home equity loan, which is fine—just be ready with the paperwork.

The typical timeline: get the home equity loan approved and funded (two to four weeks), deposit the funds in your account, then apply for the new mortgage within a few weeks. This keeps the paper trail clean and the lender confident.

Alternatives if a home equity loan is not an option

If you do not have enough equity in your home, or if your credit score is too low to may have access to for a home equity loan, you have other options. A cash-out refinance replaces your entire mortgage with a new, larger one and gives you the difference in cash. This works if interest rates are favorable and you are willing to restart your mortgage term.

You can also save for the down payment without borrowing, delay the purchase until you have saved more, or look for a property with a lower price so you need less down. Some first-time buyer programs allow down payments as low as 3 percent, which reduces the amount you need to borrow.

A personal loan is another route, though interest rates are typically higher than home equity loans (often 10 to 36 percent depending on credit). The lender will still see it as borrowed money, so it affects your debt-to-income ratio the same way.

What happens if you cannot pay both mortgages

If you fall behind on either your primary mortgage or your home equity loan, both lenders can take action. The primary mortgage lender has first claim on your home (they are in first position). The home equity lender is in second position and gets paid only after the first mortgage is satisfied.

If you default on the home equity loan, that lender can sue you or place a lien on your home, but they cannot foreclose unless the first mortgage is also in default. If you default on the primary mortgage, the lender can foreclose and sell the home. The proceeds go first to the primary lender, then to the home equity lender, and anything left goes to you. In many cases, the home equity lender gets nothing.

This is why lenders charge more for home equity loans—the risk is real. Before you borrow, make sure you can afford both payments if your income drops or circumstances change.

Frequently Asked Questions

Can I use a HELOC instead of a home equity loan for a down payment?

Yes, but it is less common. HELOCs have variable rates, so your payment can change, and lenders sometimes hesitate to approve a new mortgage when the down payment source has a variable rate. A home equity loan with a fixed rate is simpler and more predictable for both you and the new lender.

Will using home equity as a down payment hurt my credit score?

Taking out a home equity loan will cause a small, temporary dip in your credit score (usually 5 to 10 points) because the lender pulls your credit report and you have a new account. The score typically recovers within a few months if you make on-time payments. Applying for the new mortgage will also pull your credit, but multiple mortgage inquiries within 14 to 45 days usually count as one inquiry.

What if I sell my home before I pay off the home equity loan?

When you sell, the proceeds go to pay off both loans—the primary mortgage first, then the home equity loan. If the sale price is high enough, you walk away with cash after both are paid. If the sale price is low and does not cover both debts, you still owe the home equity lender the difference, and they can pursue you for it.

Can I borrow 100 percent of my home's equity?

Most lenders will not let you borrow more than 80 to 90 percent of your home's total value, minus what you still owe on the primary mortgage. This protects them if your home's value drops. If your home is worth $300,000 and you owe $200,000, most lenders will let you borrow up to $40,000 to $70,000 in equity, not the full $100,000.

Do I have to tell my primary mortgage lender that I am taking out a home equity loan?

Check your mortgage documents—some mortgages require you to notify the lender before taking out a second loan. Most do not prohibit it, but they want to know. It is better to disclose it than to have the lender discover it during a routine check and question whether you violated your loan terms. The new mortgage lender will find out anyway when they order a title search.