What a down payment is and why lenders require one

A down payment is the money you pay upfront when you buy a house. The rest of the purchase price comes from a mortgage loan. If a house costs $300,000 and you put down $60,000, the lender gives you a $240,000 mortgage.

Lenders require down payments because they reduce the lender's risk. If you stop paying your mortgage, the lender can sell the house. A larger down payment means the house is more likely to sell for enough to cover what you still owe. Down payment size also signals to the lender that you have saved money and are serious about the purchase.

Down payment amounts vary widely. Some loans require as little as 3 percent of the purchase price. Others require 10, 15, or 20 percent. The exact amount depends on the loan type, your credit score, your income, and the lender's own rules.

Key Takeaways

  • Down payments typically range from 3 to 20 percent of the home's purchase price, depending on the loan type and your financial profile.
  • A larger down payment lowers your monthly mortgage payment and may eliminate the need for mortgage insurance.
  • Conventional loans, FHA loans, VA loans, and USDA loans each have different down payment rules and requirements.
  • Saving for a down payment takes time, but first-time buyer programs and gifts from family members can help you reach your goal.
  • Putting down less than 20 percent usually means paying mortgage insurance, which adds to your monthly housing cost.

How down payment size affects your monthly payment and total cost

A larger down payment reduces the amount you borrow, which lowers your monthly mortgage payment. On a $300,000 house with a 30-year mortgage at 7 percent interest, a $60,000 down payment (20 percent) results in a monthly payment around $1,680. A $30,000 down payment (10 percent) results in a monthly payment around $1,890. The difference compounds over 30 years.

Down payment size also determines whether you pay mortgage insurance. If you put down less than 20 percent on a conventional loan, the lender requires you to buy private mortgage insurance, or PMI. PMI protects the lender if you default. It typically costs 0.5 to 1.5 percent of your loan amount per year, added to your monthly payment. Once you have paid down the loan to 80 percent of the home's original value, you can request to stop paying PMI.

A smaller down payment lets you buy sooner, but you pay more over time. A larger down payment costs more upfront but saves money on interest and insurance over the life of the loan.

Down payment requirements by loan type

Conventional loans are mortgages from private lenders not backed by the federal government. Most conventional loans require a down payment of at least 3 to 5 percent, though some lenders require 10 or 20 percent. Your credit score and debt-to-income ratio affect which down payment options are available to you.

FHA loans are insured by the Federal Housing Administration and are designed for first-time buyers and people with lower credit scores. FHA loans require a minimum down payment of 3.5 percent. You must also pay mortgage insurance for the life of the loan, even after you reach 20 percent equity. FHA loans have income limits in some areas.

VA loans are available to military members, veterans, and surviving spouses. VA loans often require zero down payment. You do not pay mortgage insurance. VA loans are available through the Department of Veterans Affairs and private lenders.

USDA loans are for rural homebuyers who meet income limits. USDA loans require zero down payment and do not require mortgage insurance in the traditional sense, though you pay a may provide fee. These loans are available through the U.S. Department of Agriculture.

Where down payment money comes from

Most people save down payment money over months or years by setting aside a portion of their paycheck into a dedicated savings account. Some employers offer down payment information programs as an employee benefit. A few states and cities offer down payment information grants or low-interest loans for first-time buyers, though rules and income limits vary by location.

Family members can gift you down payment money. The gift must be a true gift with no expectation of repayment. Lenders require a signed gift letter from the family member stating the amount, that it is a gift, and that no repayment is expected. Some loan types limit how much of your down payment can come from a gift.

Borrowing down payment money from a friend or family member as a loan (rather than a gift) can disqualify you from some loan programs or require you to disclose the debt when calculating your debt-to-income ratio. Retirement accounts like 401(k)s and IRAs sometimes allow withdrawals for first-time home purchases, though this triggers taxes and penalties in most cases.

Costs beyond the down payment

The down payment is not the only money you need at closing. Closing costs typically range from 2 to 5 percent of the loan amount and cover appraisal fees, title insurance, attorney fees, property taxes, homeowners insurance, and lender fees. On a $240,000 mortgage, closing costs might be $5,000 to $12,000.

Some lenders allow you to roll closing costs into the mortgage, which means you pay them over time with interest. Other lenders require you to pay them at closing. Ask your lender which costs you must pay upfront and which can be financed.

You also need money for a home inspection (typically $300 to $500) and an appraisal (typically $400 to $600), which happen before closing. Some sellers pay these costs as part of the purchase agreement, but you should budget for them yourself.

Strategies for saving a down payment

Set a target amount and a timeline. If you need $40,000 in two years, you need to save about $1,667 per month. Break this into smaller milestones — $10,000 in six months, $20,000 in one year — to track progress and stay motivated.

Open a high-yield savings account separate from your checking account. These accounts earn interest rates of 4 to 5 percent (rates vary and change over time), which adds to your savings without extra effort. Keep the money separate so you do not spend it on other things.

Cut expenses where you can. Redirect the money to your down payment fund. Even small cuts add up: skipping one coffee per day saves about $1,500 per year. Sell items you no longer use. Ask for raises or take on side work to increase income.

Research first-time buyer programs in your area. Some states, counties, and cities offer down payment information, tax credits, or matched savings programs. Your local housing authority or a nonprofit housing counselor can tell you what programs exist where you live.

Common mistakes to avoid

Do not make large purchases or take on new debt in the months before you explore for a mortgage. New car loans, credit card balances, and personal loans increase your debt-to-income ratio and can lower the loan amount you may have access to for or raise your interest rate.

Do not change jobs right before explore for a mortgage. Lenders want to see stable employment history, usually at least two years in the same field. A job change can delay your process or require additional documentation.

Do not assume you need 20 percent down. Many buyers put down 5 to 10 percent and pay mortgage insurance. If waiting to save 20 percent means renting for five more years while home prices rise, a smaller down payment may make more financial sense.

Do not borrow down payment money without telling your lender. Lenders ask whether your down payment is a gift or a loan. Hiding a loan can disqualify you or result in loan denial after you have already spent money on inspections and appraisals.

Frequently Asked Questions

What is the minimum down payment I can put down?

The minimum depends on the loan type. Conventional loans typically require 3 to 5 percent. FHA loans require 3.5 percent. VA and USDA loans require zero down payment. Your credit score and income affect which minimums are available to you.

Can I use a gift for my entire down payment?

Yes, but the gift must be documented with a signed letter from the family member. Some loan types limit gifts to a percentage of the down payment. Ask your lender about their gift policy before you accept money from family.

What happens if I put down less than 20 percent?

You will pay mortgage insurance (PMI on conventional loans, or built-in insurance on FHA loans). This adds to your monthly payment. You can stop paying PMI once your loan balance drops to 80 percent of the home's original purchase price.

Should I wait to save 20 percent down or buy sooner with less?

This depends on your situation. Waiting means paying rent longer and risking home prices rising. Buying sooner with mortgage insurance means higher monthly payments now but building equity when ready. A mortgage professional can show you the numbers for your specific situation.

Can I withdraw from my 401(k) for a down payment?

Some plans allow withdrawals for first-time home purchases, but you will owe income tax on the withdrawal and may face a 10 percent penalty. Consult your plan documents and a tax professional before withdrawing, as the tax cost can be substantial.