Creative ways to pay down payment and closing costs when buying a house

10 Creative Ways to Pay for Down Payment and Closing Costs

There are many ways that you can raise the money to cover your down payment and closing costs without liquidating your personal savings.

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How To Get A Down Payment For a House and How To Get Money For Closing Costs

Down payment and closing cost assistance programs are also available options, but only if you meet the income and loan amount limits.

I want to dig deeper and discuss sources that can be used for down payment or closing costs that you might not have thought of. Here’s a list of 10 common and creative ways to come up with these funds.

VIDEO: Creative Ways to Pay Down Payment and Closing Costs

10 ways to pay for down payment closing costs

Josh Lewis, Benson Pang, and Scott Schang discuss creative ways to pay for down payment and closing costs.

1. Personal Savings

Funds that come from a personal banking account must be in the account for a minimum of 60 days before acceptance of your offer.

This is called “seasoning” your funds.  2 months of bank statements are used to show that you’ve saved this money and maintained your balances for at least 60 days.

Cash on hand, or “mattress money,” is not allowed to be used because there is no way to verify where the money came from, or document a history of being able to save money.

Large deposits that show up on your bank statements must be explained.  If you are getting gift funds from a relative, the best practice for receiving this money is described below.

If you have already deposited the gift into your checking account, it needs to be in there for 60 days before applying for your mortgage, or additional documentation will be required to show the source of the funds deposited.

Your personal savings can be used for down payment or closing costs.

2. Business Accounts

If you are self-employed, you can use business bank accounts to transfer money to escrow, or your personal banking accounts.

Using this source should be discussed with your loan officer in advance of moving money between accounts because it will require careful documentation and proof of ownership.

One alternative to get around the seasoned funds requirement when you know your going to buy a house is to move the money from your business accounts into your personal accounts at least 3 months before applying for your mortgage. That way you get around seasoned funds requirements because the money will already be in your accounts in the two months of required bank statements.

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Being self-employed adds many layers of complication when it comes to sourcing and documenting assets and income.  Be sure to have a detailed conversation with your loan officer, in addition to providing 2-3 years full tax returns, including all schedules.

3. Gift Funds

Gift funds be received by a blood or marriage relative as long as there is no expectation of it being paid back. The “gift” will need to be documented on a Gift Letter.

The Gift Letter will document the name of person gifting the money, the amount, and the fact that it is indeed a gift and there is no expectations of repayment. Your lender will provide you with the correct wording for a Gift Letter.

Best practice for receiving gift funds is to be wired directly to Escrow before closing.  This is a best practice because it will not require your donor to document where the gift came from.  The fact that they sent the wire directly is proof of the source.

If your donor gives you cash, or a check that you deposit into your account, that can open up the door to unnecessary scrutiny, and cumbersome documentation from the donor including 2 months worth of statements, and the transfer documentation for the withdrawal that was given to you.

Incorrectly transferred gift funds can not only be extremely frustrating, it can also hold up your close of escrow.  A detailed conversation with your loan officer needs to happen if you are using a gift.  Using gift funds is very easy if you follow the rules.

Gift funds can be used for either downpayment or closing costs.

4. 401K or Retirement Plan

Some retirement plans allow for a one-time loan for the purposes of buying a primary residence.  The terms of the home loan assistance from your retirement plan provider will usually dictate whether it can be used for down payment or closing costs.

There is not one way that you can borrow from a retirement account, it all depends on who manages your retirement.  I have seen retirement plans that allow for a down payment assistance loan with favorable repayment terms.

I have also seen plans that allow you to withdraw funds without penalty for the purposes of buying a home. Contact your HR department, financial advisor, or refer to your documentation to explore options for using a retirement account as a source of funds.

The lender will allow you to use funds exactly how it is documented in the retirement plan guidelines.

Funds from a retirement account can be used for either downpayment or closing costs.

5. Employer Assistance Program

If your employer has an assistance program documented in your employee handbook, and it’s available to all employees of the company, this is acceptable by most lenders.

The terms of the assistance from your employer will usually dictate whether it can be used for down payment or closing costs.  The lender will allow what is documented.

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6. Sale of Personal Property, Stocks, Metals, Crypto

If you have personal property such as precious metals, artwork, a boat, stocks, Cryptocurrency, or even another home, using the proceeds from the sale requires that you document the fact that you owned the property.

You will be required to provide a detailed paper trail showing the sale (receipt) and deposit of the proceeds (exact amount) into your personal checking or savings account.

If you cannot prove the deposit of the exact funds from the sale, you may be required to have that money seasoned for 60 days before being able to use it.  Properly documented proceeds from a sale of personal property can be used for down payment or closing costs.

Funds from the sale of personal property can be used for either downpayment or closing costs.

7. Lawsuit, Insurance Claim, or Tax Refund

If you receive money from a tax refund, insurance claim, or a lawsuit, you need to document this similarly to how you would document the sale of personal property.

Presentation of the award documentation, receipt of the money, and deposit of the money into your account all needs to have a paper trail.

Money received through a lawsuit, insurance claim or tax refund does not need to be seasoned for 60 days in your account, and can be used for either down payment or closing costs.

Side note: one great way to save for a down payment or closing costs is to make it a practice of taking every tax refund you receive and putting it directly into a separate account dedicated to saving towards a down payment. Many families can save enough for a down payment in a few years without affecting their regular spending habits by saving the “free money” from their tax returns instead of spending it on things that won’t make as big of a difference in the long-term of their lives.

8. Seller Concessions

A seller concession is a credit proved by the seller of the home to be used toward closing costs.  While it is not uncommon, the motivation of a seller to cover your closing costs can be directly relative to market conditions, and your offer.

It is recommended that you offer a higher purchase price if you are asking for the seller to pay part, or all of your closing costs so that it does not come out of their expected bottom line.

Another strategy used by some sellers is to offer to pay discount points instead of a closing cost credit.  Discount points are used to permanently buy down your interest rate, which could save you 10’s of thousands or more over the term of the loan.

Seller concessions can be used to pay for closing costs only, not down payment.

Seller concessions are one way of getting a portion of your closing costs waived.

9. Lender Credit

A lender credit can be used to cover closing costs, but not down payment.  A lender credit means the lender can either waive standard fees, or by using premium pricing to generate a rebate.

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Premium pricing occurs when you agree to take a higher interest rate in exchange for a credit to be applied to the closing costs of your home.

In competitive markets where it will put you at a competitive disadvantage to ask for seller concessions, using premium pricing to generate enough rebate to cover closing costs is a very good strategy.

A lender credit can be used to cover closing costs, but not down payment.

A lender credit is another way to get a portion of your closing costs waived.

10. Cash on Hand

Cash on hand is money that you have in your possession but is not deposited in a bank or other financial institution.  This money can only be used if it is first deposited into a bank or financial institution, like a credit union.

The money must be documented as being in that institution for 60 days.  The lender will usually ask for 2 months’ worth of account statements showing the money is already in there.  You do not want to give them the statement for the month that the money was deposited, so be sure to get it into your accounts 3 months before applying for a mortgage..

Frequently Asked Questions About Closing Costs and Down Payments

What Is Seasoned Money?  How Do You Season Funds?

One of the things a mortgage lender is looking for in the mortgage approval process is long-term evidence that you have the cash and reserves needed to continue paying your mortgage over time. One way they’ve done that is through a criterion called seasoned money or seasoned funds.

Seasoned money means money that has been in your accounts for more than 2 months (more accurately, money that appears in your balance on at least 2 monthly statements before your mortgage application.) Any balances that have been in your bank accounts for more than 2 months are considered to be seasoned, and they generally won’t question where they came from.

The opposite is also true – any significant deposits into your accounts that appear on your last two statements (or after your last statement) will probably be questioned during the mortgage underwriting period.

So, if you have an abnormally large sum of money that you will want to have to pay for your downpayment, closing costs, etc. it’s best to plan ahead and get that money into your accounts at least 3 months before your mortgage loan application.

For example, if you plan to sell stocks, metals, crypto, a car, etc. – get it done and deposited into your accounts at least 3 months before your application. The same thing applies to cash deposits, owner withdrawals from your business, gift funds from others, etc. 

In short, if the money is in your account for at least 2 statements before your mortgage application, that money will be considered seasoned money for your mortgage and shouldn’t create a problem.

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Can I Borrow Money For A Down Payment?

In short, no. Any money received from a blood or marriage relative must be justified through a Gift Letter stating that this is a gift and there are no expectations of repayment. Some people will create a side deal with their family members, but doing so is risky ethically and legally.

If you were to get a loan from any source to be used as part of your down payment, that loan would need to be revealed to the lender, and the loan amount and repayment schedule would be considered part of your total indebtedness ratios and Debt-to-income ratios.

When Do You Pay The Down Payment On A House? When Do You Pay Closing Costs And Down Payment?

Youpay closing costs and your down payment on closing day. Payment is usually made with a cashier’s check or wire transfer. 

Your lender will provide you documents that will show you exactly how much you will need to bring to your closing several days before your closing date, to allow you sufficient time to get a cashier’s check or a wire transfer arranged prior to that date. 

This will require pre-planning to ensure that all the required funds are transferred to an account well in advance (more than 60 days is ideal so the money is seasoned) and available to be included in a cashier’s check or wire transfer.

What If I Can’t Afford Closing Costs?

Not being able to afford closing costs can be a major problem, because you can’t get the keys to your house unless they are paid.

Early on in the loan approval process your mortgage lender will provide you an estimate of the closing costs you will need for closing. If you can’t afford those closing costs, you need to notify your lender immediately.

There are some options a lender can use if you can’t afford closing costs, like adding some of the closing costs into the loan amount. But they need plenty of notice to do so. You can’t let them know at the last minute and expect to close on your expected closing day.

I’ve also outlined 10 other options in this article. I’d definitely start there.

Can I Use 401k Funds To Pay My Down Payment If I’m A First-Time Home Buyer?

It all depends on your specific 401k plan’s conditions. Many of them contain a provision for you to either take a loan or make an early withdrawal to pay a down payment on a house. In most cases, financial advisors would probably advise against doing this if at all possible. But if the option is there, you may want to consider using it. 

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If you choose to transfer funds from your 401k, 403b, IRA, or other retirement plan option, it is usually best to do so at least 3 months prior to applying for a mortgage, so they will be seasoned funds (the funds will be in your account prior to two statements that will be requested by the lender.)

Is The Down Payment Included In Closing Costs?

No, your down payment and closing costs are two different things. You choose how much down payment you want to make, while your closing costs are fees you have to pay in order to finalize the purchase of your house. 

However, there are some similarities. Both closing costs and your down payment are due at closing, and when you look at the report your mortgage lender will give you showing the amount of money due at closing, your down payment amount will possibly be listed under closing costs. But they’re separate amounts, and should be thought of that way.

Is Closing Cost Included In Down Payment?

No, closing costs are separate and additional fees on top of your down payment. Your down payment is the amount you are paying directly, and are taken out of the purchase price to compute the amount of your loan. Closing costs are a set of fees that cover the costs of issuing the mortgage and legally transferring ownership of the property. 

However, both closing costs and the down payment amount are due at closing – meaning you will need to either have your banker make a wire transfer or bring a cashiers check to hand over as part of the closing ceremony.

What Happens If You Pay Back A Gifted Down Payment?

Technically, nothing. That process is between you and the person who gave you the gift. However, the person/people providing those funds must legally state that the amount they have given is a real gift, which for which they are not planning or expecting to be repaid. They have to provide a gift letter to the lender to document that fact, stating the name of person gifting the money, the amount, and the fact that it is indeed a gift and there is no expectations of repayment. Your lender will provide you with the correct wording for a Gift Letter. If, however, you were to give them an envelope a few years later containing that same amount, you are not required to inform your mortgage lender, and you won’t lose your house.

Hire a Professional

You can do your homework.  You can save your money for the down payment and closing costs.  You can do everything right on your end, but if you get stuck with a call center lender, all that preparation could be meaningless.

Do not underestimate the value of using a professional to guide you through homeownership decisions.  Professional loan officers solve problems for a living.

Everyone is an expert until you encounter a challenge.  You only need an expert if something pops up.

Since it does not cost more to use an experienced professional, why would you ever risk something as important as your home to a call center kid with little to no experience solving the problems that can come up while applying for a home loan?

We’ve assembled a network of experienced professionals in all 50 states that can help you here at the Find My Way Home Expert Network.

Have Questions About Down Payment or Closing Costs?

We can help! You can Ask Your Question here, and we will connect you with a Mortgage Expert in your area that can help, or you can find a Mortgage Expert Near You below this article.

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Amber says:

    I am trying to find grants to assist with down payments or closing costs.

    • Hi Amber, I would start by looking up your State Housing Finance Agency. They are most likely to have more information about special programs available in your State.

      If you would like, shoot me an email at scott@findmywayhome.com and let me know what State you’re in. I can introduce you to an experienced loan officer that can help you with that search.

      Hope this helps?

  • Kevin Johnson says:

    Can My employer through payroll be allowed to advance reserves? I have all the closing
    Funds already in my account through my pay.

    • Hi Kevin, this is a really good question. Typically, a gift from an employer is allowed if that same opportunity is available to all employees of the company. This policy also should be documented in an employee manual.

      Also, reserves do not need to be in your checking or savings account. For instance, a 401k is considered reserves.

      Reserve and gift guidelines are going to be different depending on the type of financing you’re using as well. For instance, if you’re using an FHA loan, you rarely need reserves to get an automated loan approval.

      If you have any other questions, feel free to shoot me an email directly to scott@findmywayhome.com

      Hope this helps?

  • Angela Bunton says:

    I am due to close on house in 1 week. I have the down payment money in my account $15000 and have submitted documentation of funds. I am going to need an additional $2000 for closing cost, which I have in cash. I did not realize that you are not suppose to make large deposits without documentation of the money. It is money that I saved from yard sale, ebay sales, etc. Is there a way to use this money? Or are that gonna stop my closing? Or do I just need to get a gift? Any Help? Thank you.

    • Hi Angela, this is definitely going to be a little difficult unless you have receipts for everything that you’ve sold. What I would suggest is to see if you have a relative that has the money to “gift” to you (they must already have it in their account). Then, you can give your relative the cash after close.

      The other option is that if that money has been in your account for 60 days, it’s considered sourced and seasoned. How long until you can have 2 bank statements showing that money on deposit?