Quick overview

A HELOC lets homeowners borrow up to an approved limit using their current home as collateral. Borrowers can use those funds to cover a down payment gap on a new purchase, but doing so changes your debt profile and typically requires extra documentation and lender approvals.

How it works in practice

  • You apply for a HELOC on your existing property and the lender sets a credit limit based on loan-to-value (LTV), credit score, and income. (See CFPB guidance on HELOCs for basics: https://www.consumerfinance.gov/consumer-tools/home-equity-lines-of-credit/.)
  • You draw the needed amount (for example, $20,000) and transfer it to your account to fund the down payment.
  • At mortgage underwriting, the new lender will verify the source of funds, inspect bank statements, and may treat the HELOC draw as borrowed funds rather than savings.

In my 15 years helping clients, I’ve seen two common paths: borrowers either close the HELOC ahead of purchase or provide lender documentation showing the HELOC draw is a legitimate, seasoned source. Without clear documentation, mortgage underwriters can delay or deny approval.

Key risks to weigh

  • Interest-rate risk: Most HELOCs have variable rates. If rates rise, monthly payments can increase during the draw or repayment period.
  • Dual mortgage risk: A HELOC is a second lien on your current home. If you default, you risk two properties (the one securing the HELOC and the new mortgage) depending on your structure.
  • Underwriting and approval risk: Many lenders limit or disallow using newly borrowed funds for a down payment. Even if allowed, expect additional verification and possibly higher required reserves.
  • Cash-flow / DTI impact: HELOC payments or the lender’s calculated monthly obligation can increase your debt-to-income (DTI) and affect mortgage eligibility.
  • Tax considerations: HELOC interest may be tax-deductible only when used to buy, build, or substantially improve the home that secures the HELOC; rules changed under the Tax Cuts and Jobs Act. Confirm details with IRS guidance (see IRS Publication 936) or a tax professional: https://www.irs.gov/forms-pubs/about-publication-936.

Documentation lenders usually require

  • Source-of-funds evidence: bank statements before and after the HELOC draw showing the deposit and transfer into the purchase account.
  • HELOC account agreement and disclosure statements showing the line’s limit, interest rate, and repayment terms.
  • Lender payoff or lien documentation: if the new mortgage lender needs the HELOC subordinated or paid off, you’ll need a subordination agreement or payoff plan.
  • Proof of seasoning: some underwriters want to see the HELOC funds in your account for a set period (often 30–60 days) before they’re eligible as acceptable down payment sources.
  • Income verification and updated DTI calculations: underwriters will re-run ratios including HELOC obligations.

Document examples to keep ready:

  • HELOC statements and account opening paperwork
  • Bank statements with annotated transfers
  • Settlement statements if paying the HELOC off at closing
  • A written subordination agreement if the HELOC remains after purchase (work with both lenders)

Underwriting nuances

Lenders follow different overlays. GSEs (Fannie Mae/Freddie Mac) and FHA have distinct rules about borrowed funds for down payments, seasoning requirements, and whether a second lien can remain. Always check your mortgage lender’s policy. See our related guide on how lenders verify down payment sources: Down Payment Sources Verification (https://finhelp.io/glossary/down-payment-sources-verification/).

If you’re deciding between options, compare a HELOC to alternatives like a cash-out refinance or a bridge loan. Our comparison of HELOC vs cash-out refinance can help you weigh costs and impacts: HELOC vs Cash-Out Refinance (https://finhelp.io/glossary/heloc-vs-cash-out-refinance-pros-cons-and-costs/).

Practical tips

  • Ask your mortgage lender early if they allow HELOC-funded down payments and what proof they require.
  • Request a subordination from your HELOC lender if you want the line to remain after buying a new home; this can take time and fees. See: How loan subordination affects second mortgages and HELOCs (https://finhelp.io/glossary/how-loan-subordination-affects-second-mortgages-and-helocs/).
  • If rates are volatile and you need certainty, consider locking a portion as a fixed-rate second mortgage or choosing a short-term bridge loan.
  • Run the numbers: include HELOC interest, fees, and the potential effect on your monthly cash flow before deciding.

When to avoid using a HELOC for a down payment

  • If the HELOC would push your combined housing costs and debts to an unsustainable level.
  • If your lender will not accept recently borrowed funds for the down payment (no amount of documentation will change that policy).
  • If you can secure a safer alternative—gift funds allowed by the lender, down-payment assistance programs, or a cash-out refinance with better long-term terms.

Sources & next steps

Professional disclaimer: This article is educational and not individualized financial, mortgage, or tax advice. Rules and lender policies change—talk with your mortgage lender and a tax professional before using a HELOC for a down payment.

If you want a tailored checklist for lender-ready documentation, I can draft one based on your purchase timeline and lender requirements.