Saving for a down payment is often one of the biggest hurdles to homeownership for homebuyers nationwide.
Parents or family members who have built equity in their own homes often want to help by providing a gifted down payment for a house.
One way to do this is to access funds and provide financial support through a home equity line of credit (HELOC).
But is this a good strategy? And what are the potential risks and benefits?
Let’s explore whether you can use a HELOC for a gifted down payment, how the process works, and what to consider before borrowing against your home equity.
Access cash within days
Tap into your home’s potential in minutes. Start our streamlined digital application to discover if a HELOC is right for you.
What is a home equity line of credit?
Home equity lines of credit—also known as HELOC—allow homeowners to borrow against their property’s equity.
Unlike a traditional loan, a HELOC provides a revolving credit line, meaning homeowners can borrow, repay, and borrow again during the draw period (typically 5–10 years).
Key features of a HELOC:
- Flexible borrowing: Withdraw funds as needed instead of receiving a lump sum.
- Variable interest rates: Monthly payments may fluctuate based on market rates.
- Secured by home equity: The loan is backed by the borrower’s home, typically resulting in lower interest rates than personal loans or credit cards.
Can you use a HELOC to gift a down payment for a house?
Yes, approved homeowners can use a HELOC to gift a down payment to a family member.
It’s not uncommon for parents or relatives to take out a HELOC to help a child or loved one afford homeownership. However, lenders require that down payment gifts meet specific conditions.
Lender requirements for a gifted down payment
When a homebuyer receives a down payment gift, the lender will typically require:
- A gift letter must confirm that the money is a gift, not a loan
- Documentation showing the source of funds, including bank statements or HELOC withdrawal records
- A relationship between the donor and recipient (most lenders only allow gifts from immediate family members)
Using a HELOC to fund the gift doesn’t automatically disqualify it, but the lender may inquire about the donor’s financial situation to ensure they can manage the HELOC debt responsibly.
Pros of using a HELOC to gift a down payment for a house
1. Provides immediate access to funds
A HELOC allows homeowners to access cash without selling assets or depleting savings quickly.
This makes it an attractive option for those who want to help a family member purchase a home without liquid cash.
2. Lower interest rates than personal loans
Since HELOCs are secured by home equity, they typically offer lower interest rates than personal loans or credit cards.
This makes borrowing more affordable compared to other financing options.
3. No restrictions on fund usage
Unlike some loans with specific usage requirements, HELOC funds can be used for any purpose—including a gifted down payment. There are no restrictions on how the money is spent, giving homeowners full control.
4. Potential tax benefits
If the HELOC is used for home improvements, the interest may be tax-deductible.
However, the interest is not deductible under current IRS rules if the funds are used for a gifted down payment.
Homeowners should consult a tax professional for individualized guidance.
Cons of using a HELOC for a gifted down payment
1. Increased financial risk
Since a HELOC is secured by the borrower’s home, missing payments could put their property at risk of foreclosure. Homeowners should ensure they can manage repayment before borrowing.
2. Impact on personal borrowing power
Taking out a HELOC increases debt, affecting the homeowner’s credit score and debt-to-income (DTI) ratio.
This may limit their ability to qualify for other loans or refinance their mortgage in the future.
3. Variable interest rates
Most HELOCs have adjustable interest rates, meaning monthly payments could rise if interest rates increase. This can make budgeting more difficult in the long term.
4. Possible tax implications
The IRS allows individuals to gift up to $18,000 per year (as of 2024) without triggering gift taxes.
If the gift exceeds this limit, it may count toward the lifetime gift tax exemption of $13.61 million.
Donors should consider tax consequences before making large financial gifts.
Alternatives to using a HELOC for a gifted down payment
If borrowing against home equity feels too risky, consider these alternative ways to help a family member buy a home:
- Gifting cash from savings: If available, using personal savings instead of a HELOC will eliminate the need to take on debt but deplete your savings for expenses like retirement.
- Co-signing the mortgage: By adding their income and creditworthiness to the loan application, a co-signer can help approve the mortgage—but they are legally responsible for repayment if the borrower defaults.
- Offering a private loan: Loaning money directly to the buyer with agreed-upon repayment terms can provide financial assistance—but family loans can cause internal family tensions.
- Seller-financed transactions: If the family member is purchasing the home from a relative, the seller can finance part of the purchase price through a structured payment plan instead of gifting a down payment.
Key considerations before using a HELOC
Before borrowing against home equity, homeowners should ask themselves:
- Can I afford the additional debt? Ensure that HELOC payments fit within your budget.
- What happens if interest rates rise? Consider how fluctuating rates may impact long-term payments.
- Will this affect my retirement or financial plans? Avoid jeopardizing future financial security.
- Is the recipient financially responsible? Ensure the homebuyer can manage mortgage payments to avoid future financial strain.
How a HELOC can help you gift your loved one a down payment
Can you use a home equity line of credit (HELOC) as a gift down payment on a house? A HELOC can be a viable option, providing immediate access to funds at lower interest rates.
However, homeowners must carefully consider the risks, lender requirements, and tax implications before borrowing against their home equity.
Thinking about using a HELOC for a gifted down payment for a house? One of the best ways to find out what your best HELOC solution might be is to apply right away.
HomeEQ’s fast and easy HELOC application process will tell you in minutes if you’re approved. There’s no obligation; you could have your funds in days, not weeks.
