Real-world buyers stack 2-3 funding sources to get to closing. Below is the cited menu. Every item links to the IRS code, IRS pub, or CFPB/lender source.
Family gift toward down payment / closing
Parents, grandparents, siblings can gift you down-payment cash. The IRS gift tax does not apply to the recipient — only the donor is potentially affected, and only above the lifetime exclusion.
Pros - Most flexible source of down-payment cash.
- No interest, no repayment, no impact on your DTI.
- Allowed by all major loan programs (Conv, FHA, VA, USDA) on primary residences.
Cons - Donor must NOT be the seller, real-estate agent, builder, or anyone with a financial interest in the transaction.
- Lender requires a signed gift letter + paper trail showing funds in donor's account THEN the transfer.
- On Conventional loans, gift is unrestricted on primary. On second homes / investment properties Fannie/Freddie limit gifts.
Key 2025 numbers: - annualExclusion: $19,000
- annualExclusionMFJ: $38,000
- lifetimeExclusion: $13,990,000
Sources: IRS Rev. Proc. 2024-40 (2025 inflation adjustments), IRS Form 709 Instructions (Gift Tax), Fannie Mae B3-4.3-04 (Personal Gifts).
401(k) loan (NOT withdrawal)
Borrow against your 401(k) balance, repay yourself with interest. NO 10% penalty, no income tax — it is a loan from your future self.
Pros - No credit check; no impact on FICO.
- Interest rate is typically prime + 1% — but interest goes back to YOUR account, not the bank.
- Repayments come from W-2 paycheck (after-tax) but the loan principal is also after-tax money.
- IRS allows up to 50% of vested balance OR $50,000 — whichever is less (IRC §72(p)(2)(A)).
- For a primary residence purchase, the repayment term can extend beyond the standard 5 years (IRC §72(p)(2)(B)(ii)).
Cons - If you separate from your employer, the loan is typically due by your tax-filing deadline (SECURE Act 2017 extension). Unpaid → deemed distribution → 10% penalty + ordinary income tax.
- Money out of the market = opportunity cost. If S&P returns 12% while your loan rate is 7%, the loan costs you 5% net.
- You miss any employer match on contributions you can't make while repaying.
- Plan-administrator-specific — some plans don't allow loans at all.
Key 2025 numbers: - maxLoan: $50,000
- maxPctVested: $0.5
- defaultTerm: 5 years
- primaryResidenceTerm: up to 30 years (plan-specific)
Sources: IRC §72(p), IRS — Considering a Loan from your 401(k), SECURE Act 2017 (TCJA Sec 13613) — separation-rollover relief.
401(k) hardship withdrawal — for first home
Take cash out of 401(k) for primary-residence purchase. Allowed under hardship rules but it costs you significantly.
Pros - No repayment.
- Funds are immediately yours.
Cons - 10% early-withdrawal penalty applies. (First-home exception ONLY exists for IRAs, not 401(k)s — common confusion.)
- Withdrawal is fully taxable as ordinary income.
- You permanently lose those dollars' future market growth — far worse than a 401(k) loan in almost every case.
- Plan must permit hardship withdrawals (most do).
Sources: IRS — Retirement Topics: Hardship Distributions, IRC §401(k)(2)(B)(i)(IV).
Roth IRA — first-time-homebuyer withdrawal
You can ALWAYS withdraw your Roth contributions tax-free + penalty-free. On TOP of that, you can take up to $10,000 of EARNINGS for a first-home purchase, penalty-free + (if account is 5+ years old) tax-free.
Pros - Roth contributions: penalty-free + tax-free withdrawal at any time, for any reason.
- Earnings: up to $10,000 lifetime penalty-free for first-time-homebuyer (IRC §72(t)(2)(F)).
- If account is 5+ years old AND withdrawal is for first-home, the $10,000 in earnings is also tax-free.
- Spouses each have their own $10K — so MFJ couples can pull up to $20K of earnings combined.
- "First-time" means no home ownership in the past 24 months — many returning buyers qualify.
Cons - $10,000 lifetime cap is small for high-cost markets.
- The earnings withdrawal is permanent — no repayment, no refill.
- Reduces tax-free retirement growth.
Key 2025 numbers: - earningsExceptionCap: $10,000
- contributionsAlwaysFree: always — yours after tax
- mfjCombined: $20,000
Sources: IRC §72(t)(2)(F) — First-time homebuyer exception, IRS Pub 590-B — Distributions from IRAs.
Traditional IRA — first-time-homebuyer withdrawal
Same $10,000 first-time-homebuyer penalty waiver as Roth, but the withdrawal IS taxable as ordinary income (you got the deduction going in).
Pros - No 10% early-withdrawal penalty on the first $10,000.
- Lifetime cap is per-person — couples get $20,000 combined.
Cons - Fully taxable as ordinary income — at 22% marginal rate, $10K withdrawal nets ~$7,800.
- Cap is shared with the Roth $10K — same lifetime $10K applies across both account types.
Sources: IRS Pub 590-B.
HELOC or Home Equity Loan — bridge from existing home
Borrow against equity in your existing home for the new home's down payment. Sell or rent the existing home after.
Pros - No need to liquidate retirement or investment accounts.
- Mortgage interest typically still deductible up to the $750K TCJA cap when used for "buy/build/improve" qualifying purchase.
- HELOC = revolving line, only pay interest on drawn balance.
- Closes faster than first-mortgage refinance — HELOC often 14-21 days.
Cons - Lien on existing home until paid back.
- Carrying two mortgage payments until existing home sells.
- HELOC rates are variable (prime + spread), can spike with Fed rates.
- Rate-and-term refi or HELOC on existing home is a separate underwrite.
Sources: IRS Pub 936 (Home Mortgage Interest), CFPB — HELOC vs Home Equity Loan.
Seller financing / Owner-carry / Land contract
Seller acts as the bank: takes the down payment, takes a promissory note from you for the balance, holds a deed of trust. You pay seller monthly until paid off (often refinanced into a regular bank loan after a few years).
Pros - No traditional bank underwriting — useful for self-employed, foreign nationals, or borrowers with thin credit who can't qualify conventionally.
- Often interest-only or balloon structures the buyer + seller agree on.
- Closing speed: 1-3 weeks vs 30-45 days for bank loan.
- Common on FSBO transactions (For Sale By Owner — no real-estate-agent involvement).
Cons - Seller is the lien-holder. They can foreclose if you default.
- Higher interest rate than market — seller is taking the risk a bank is paid to take.
- Dodd-Frank limits: an individual seller can owner-finance up to 3 properties per 12 months without becoming a "loan originator" subject to RMLO licensing (15 U.S. Code §1602(cc) + Regulation Z §1026.36).
- Seller must verify Ability-to-Repay (ATR) per Dodd-Frank — proof of income, asset documentation.
- Land contract structures vary by state — Iowa, Michigan, Indiana, Ohio have specific consumer-protection laws.
Sources: Dodd-Frank §1602 / Reg Z §1026.36 — owner-finance limits, CFPB — seller-financed transactions, NCSL Land Contract Laws by State.
Lease-to-own / Rent-to-own
You rent the home for 1-3 years with an option (or obligation) to buy at a pre-set price at lease end. Part of rent often credited toward down payment.
Pros - Lock in purchase price now in a rising market.
- Build down-payment fund through rent credits.
- Time to repair credit, build SE income history, or save the rest of the down payment.
Cons - Premium rent — typically 10-20% above market because of the purchase option.
- If you don't buy at lease end, you forfeit option fee + any rent credits (in option-only structures) or are obligated to buy (in lease-purchase structures).
- Many lease-to-own structures historically pushed by predatory operators — read every clause + run by a real-estate attorney.
- Strong NCSL state-level scrutiny since 2010s consumer-protection era.
Sources: CFPB — Rent-to-Own Contracts, NCSL — Lease-Purchase Agreements.
FHA 203(k) Rehab Loan
FHA-insured mortgage that ROLLS RENOVATION COSTS into the home loan. Buy a fixer-upper + finance the rehab with one loan, one closing.
Pros - Low down (3.5% with FHA standard).
- Renovation amount based on AS-COMPLETED appraised value, so you can borrow against post-rehab equity.
- Standard 203(k) covers structural / major rehab. Limited 203(k) covers non-structural up to $75,000.
- Useful in markets where existing inventory is older / needs work.
Cons - FHA mortgage insurance for the life of the loan (cannot be removed without refinancing).
- Construction process adds 30-90 days to closing timeline.
- Strict HUD-approved-consultant requirements on the standard 203(k).
- Overhead/contingency reserves required (10-20% of rehab budget).
Sources: HUD — 203(k) Rehab Mortgage Insurance.
Fannie Mae HomeStyle Renovation
Conventional rival to FHA 203(k) — finances rehab in a conventional loan. No FHA mortgage insurance for life — PMI drops at 20% equity.
Pros - PMI drops at 20% equity (not for life like FHA MI).
- Wider eligible-property scope than FHA 203(k) — investment properties allowed up to specified limits.
- Up to 75% of "as-completed" value can be borrowed.
Cons - Higher minimum credit score (~620) and stricter DTI than FHA 203(k).
- Requires HUD/Fannie-approved consultant for project oversight.
- Same construction-timeline complexity as 203(k).
Sources: Fannie Mae HomeStyle Renovation.
Assumable mortgage (FHA / VA / USDA)
Take over the seller's existing loan at its existing rate — extremely valuable when the seller's loan is 2.5-4% from 2020-2022 and current market rates are 6-7%.
Pros - FHA, VA, and USDA loans are all assumable — qualified buyer + lender approval.
- Locks in the seller's low historical rate.
- On a $400K loan, going from 7% → 3% saves ~$1,400/month — directly recoverable in the purchase price negotiation.
- VA assumption: any qualified buyer can assume (not just veterans), but the seller's VA entitlement stays tied to the loan unless replaced.
Cons - You must qualify per the original loan's underwriting standards.
- Loan amount = the seller's remaining balance, not the home's purchase price → buyer needs to bring CASH (or a second loan) for the gap.
- Lender approval can take 30-90 days.
- Conventional loans (Fannie/Freddie) include due-on-sale clauses → not assumable.
Sources: VA — Loan Assumption Process, HUD — FHA Loan Assumption.
Securities-Backed Line of Credit (SBLOC) / Pledged Asset Line
Borrow against an investment account (brokerage, RSU vest holdings) without selling. Used as a down-payment bridge or to pay all-cash and finance later.
Pros - No taxable event (you don't sell — capital gains untriggered).
- Rates often SOFR + 1-3% — competitive with mortgage rates, sometimes lower.
- Brokerage lenders (Schwab, Fidelity, Morgan Stanley, JPM) can fund in days vs weeks.
- Especially useful for tech employees with concentrated RSU positions.
Cons - Variable rate — can rise with Fed.
- Maintenance margin requirements: if your portfolio drops, you may face a forced sale at the worst time.
- NOT a mortgage — no IRS deduction unless used for "buy/build/improve" home.
- FINRA + SEC issued investor alerts on SBLOC liquidation risk in 2024.
Sources: FINRA — SBLOC Investor Alert, SEC — SBLOC Investor Bulletin.
Crypto-collateralized USD loan
Pledge BTC / ETH / other tokens as collateral; receive USD without selling. Wired to title company or bank at closing. Avoids capital-gains tax that would hit if you simply sold to fund the purchase.
Pros - No taxable sale — you keep upside on the crypto.
- Funding in 1-3 days at established providers.
- Used for all-cash purchases that buyers later refi into a regular mortgage (cash-out refi 6 months later).
- No income / employment / credit underwriting at most providers.
Cons - High loan-to-value (LTV) cuts: typically 33-50% LTV. $400K home with $200K USD loan needs $400-600K in BTC/ETH collateral.
- LIQUIDATION RISK: if collateral drops below maintenance margin, lender liquidates at the worst time (typically a market crash).
- Origination fees + variable interest rates 8-15% common.
- Vendor solvency is an unsolved problem — Celsius, BlockFi, Voyager all collapsed in 2022. Surviving providers (Ledn, Unchained, Coinbase Borrow in some states) face state-level securities scrutiny.
- Title companies + banks vary in willingness to accept funds documented as a "crypto-secured loan" — some won't.
- IRS treats BTC/ETH as property (Notice 2014-21): pledge → loan is generally not a taxable event, but the rules are evolving.
Sources: IRS Notice 2014-21 — Virtual Currency tax treatment, Ledn (crypto-secured USD loans), Unchained Capital, Coinbase Borrow, CFTC — DeFi & lending platforms enforcement actions.
State Down-Payment Assistance (DPA) + Hometown Heroes
Most states + many cities offer DPA via their Housing Finance Agency — a forgivable second mortgage or grant covering 3-10% down. Pairs ON TOP of FHA / Conv / VA first mortgages.
Pros - Free or near-free money. Most DPA forgives after 5-10 years of occupancy.
- Pairs with first mortgage; you keep your 30-year fixed rate.
- Many states offer specialized programs for teachers, first responders, healthcare workers, veterans (Florida Hometown Heroes is the prominent one).
Cons - Income limits — typically 80-140% AMI for the area.
- Property limits — often only certain ZIPs / loan caps.
- Must work with HFA-participating lender (not every retail lender qualifies).
- Funding rounds run out — often only available a few months/year.
Sources: NCSHA HFA Directory, Florida Hometown Heroes.
Documented family loan (not gift)
Family member lends you down-payment funds at AT LEAST the IRS Applicable Federal Rate (AFR) to avoid the loan being recharacterized as a gift.
Pros - Family member earns interest on the loan instead of giving the funds away.
- Often structured as a 30-year loan paralleling the bank's amortization.
- No gift-tax issue if structured properly.
Cons - Counts in your DTI for lender qualification — unlike a true gift.
- Must be documented: promissory note, recorded deed of trust if real estate is collateral.
- AFR rates are published monthly by IRS; below-AFR rate triggers imputed-interest issues.
Sources: IRS — Applicable Federal Rates, IRC §7872 — below-market loans.
2-1 Buydown / Temporary Rate Buydown
Seller (or lender) pre-pays interest to lower your rate by 2% in year 1, 1% in year 2, then full rate from year 3 on. Common in slow markets where sellers absorb buydown.
Pros - Lower payment in years 1-2 — useful if your income is rising.
- Often paid by seller as part of negotiation — costs you nothing.
- Underwriting still runs at the FULL note rate, so DTI stays conservative.
Cons - Permanent rate is the rate-locked rate; buydown only affects years 1-2.
- If you refi or sell within 2 years, unused buydown funds go to YOU at refi (Fannie/Freddie rule) — but you may have given up purchase-price negotiation.
- Less effective when long-term rates fall (you'd refi anyway).
Sources: Fannie Mae Selling Guide B2-1.4-04 (Temporary Buydowns).