What a down payment is and why lenders ask for one
A down payment is the money you give the seller at closing — the cash that comes from your own pocket, not borrowed. 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 ask for a down payment because it reduces their risk. If you have your own money in the deal, you are less likely to walk away or default on the loan. The larger your down payment, the less the lender has to lend, and the lower the interest rate they may offer you.
Down payment amounts are expressed as a percentage of the purchase price. A 20 percent down payment on a $300,000 house is $60,000. A 5 percent down payment on the same house is $15,000. The percentage you can afford depends on your savings, your income, and the type of loan you are seeking.
Key Takeaways
- Most conventional loans require between 3 and 20 percent down, with 20 percent being the amount that avoids mortgage insurance.
- FHA loans, backed by the Federal Housing Administration, allow down payments as low as 3.5 percent and are designed for first-time buyers with lower savings.
- VA loans and USDA loans may require zero down payment if you meet the may be able to access requirements for military service or rural property purchase.
- Putting down less than 20 percent triggers private mortgage insurance (PMI), which adds to your monthly payment until you reach 20 percent equity.
- Some lenders offer down payment information programs through nonprofits or employer benefits, though these vary widely by location and employer.
Conventional loans and the 20 percent standard
A conventional loan is a mortgage not backed by a government agency. Most conventional loans require a down payment between 3 and 20 percent. The 20 percent figure is the traditional target because it is the point at which you avoid paying mortgage insurance.
If you put down less than 20 percent on a conventional loan, the lender will require you to carry private mortgage insurance (PMI). This is an insurance policy that protects the lender if you stop paying. PMI typically costs between 0.5 and 1 percent of the loan amount per year, added to your monthly mortgage payment. Once your home equity reaches 20 percent — either through payments or home appreciation — you can request to have PMI removed.
Conventional loans with 3 to 5 percent down are common and available from most major lenders. The trade-off is a higher monthly payment due to PMI and often a higher interest rate. A 10 percent down payment is a middle ground: it reduces PMI costs compared to 3 percent, but still requires less cash upfront than 20 percent.
FHA loans for buyers with smaller savings
An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency. FHA loans allow down payments as low as 3.5 percent and are designed for first-time homebuyers or buyers with limited savings. The trade-off is that FHA loans require mortgage insurance no matter what your down payment is — you cannot remove it by reaching 20 percent equity.
FHA mortgage insurance comes in two forms: an upfront premium paid at closing (usually 1.75 percent of the loan amount) and an annual premium added to your monthly payment (between 0.55 and 0.8 percent per year, depending on your down payment and loan term). The annual premium stays for the life of the loan if your down payment was less than 10 percent, or for 11 years if your down payment was 10 percent or more.
FHA loans have income limits and property limits that vary by county. They also require the property to pass an FHA inspection, which is stricter than a standard home inspection. FHA loans are most useful if you have limited savings but a steady income and a decent credit score.
VA and USDA loans with zero down
A VA loan is a mortgage may provide by the Department of Veterans Affairs and is available to military members, veterans, and some surviving spouses. VA loans require zero down payment. You pay only closing costs and any prepaid items like property taxes and insurance. This makes VA loans the most accessible option for buyers who meet the service requirement.
VA loans do not require mortgage insurance. Instead, the VA charges a funding fee — a one-time cost paid at closing that ranges from 1.4 to 3.6 percent of the loan amount, depending on your down payment and whether you have used a VA loan before. This fee can be rolled into the loan amount, so you do not have to pay it in cash.
A USDA loan is a mortgage backed by the U.S. Department of Agriculture and is available for rural properties in designated areas. USDA loans also require zero down payment and do not require mortgage insurance. Instead, they charge a may provide fee similar to the VA funding fee. USDA loans have income limits based on the area median income, and the property must be in an may be able to access rural zone.
How to figure out what you can afford to put down
Your down payment is limited by two things: how much cash you have saved and how much a lender will lend you based on your income and credit. Most lenders want your total monthly debt payments — including the new mortgage — to be no more than 43 percent of your gross monthly income. This is called the debt-to-income ratio.
Start by calculating how much you have saved for a down payment and closing costs. Closing costs typically run 2 to 5 percent of the purchase price and cover things like the appraisal, title search, and attorney fees. You need cash for both the down payment and closing costs — you cannot borrow either one.
Next, get pre-approved by a lender. Pre-approval is not a promise to lend, but it tells you the maximum loan amount you may have access to for based on your income, credit, and debts. Once you know the maximum loan, you can work backward to figure out what down payment makes sense. If you have $50,000 saved and the lender will give you a $250,000 mortgage, you can afford a $300,000 house with a down payment of about 17 percent.
Down payment information and other sources of funds
Some employers, nonprofits, and government programs offer down payment information. These programs vary widely by location and employer, so there is no single place to check them all. Common sources include employer benefits (some large companies offer down payment grants or loans), nonprofit organizations focused on homeownership in your area, and state or local government programs.
Down payment information is sometimes structured as a grant (money you do not repay), a forgivable loan (a loan that is forgiven if you stay in the home for a set period), or a second mortgage (a loan you repay separately from your primary mortgage). Some programs require you to take a homebuyer education course before you receive the funds.
You can also borrow down payment money from family members. If a family member gives you money as a gift, the lender will require a signed gift letter stating that the money is a gift and does not need to be repaid. If you borrow from family as a loan, you will need to document the terms and may need to show proof of repayment in your mortgage process.
What happens if you cannot put down 20 percent
Putting down less than 20 percent is normal and does not disqualify you from homeownership. Most homebuyers put down between 3 and 10 percent. The main cost is mortgage insurance, which increases your monthly payment. On a $300,000 house with a $15,000 down payment (5 percent), PMI might add $150 to $200 per month to your payment.
You can reduce this cost over time. As you pay down the mortgage and build equity, you move closer to the 20 percent threshold. Once you reach it, you can request PMI removal on a conventional loan. On an FHA loan, you cannot remove the insurance, but you can refinance into a conventional loan once you have enough equity and your credit has improved.
Another option is to put down a smaller amount now and plan to refinance later. If you buy with 5 percent down and your home appreciates or you pay down the principal, you may be able to refinance in a few years with a larger equity position and better terms.
Frequently Asked Questions
Can I use a credit card or loan to pay for my down payment?
No. Lenders require that your down payment come from your own savings or from a gift. If you borrow the down payment money, the lender will see it as additional debt and may deny your process or reduce the loan amount they offer. The only exception is a family gift, which must be documented with a gift letter.
What is the difference between a down payment and closing costs?
A down payment is the portion of the purchase price you pay in cash. Closing costs are the fees charged by the lender, title company, and other parties to process the loan and transfer the property. Both come from your pocket and cannot be borrowed. Closing costs typically range from 2 to 5 percent of the purchase price.
If I put down 10 percent, when can I remove PMI?
On a conventional loan, you can request PMI removal once your equity reaches 20 percent. This happens through a combination of payments and home appreciation. The timeline depends on your loan term and how fast your home value rises. On an FHA loan, you cannot remove PMI if your down payment was less than 10 percent, but you can refinance into a conventional loan once you have 20 percent equity.
Do I have to put down 20 percent to get a good interest rate?
No. You can get a competitive interest rate with a smaller down payment, though it may be slightly higher than the rate for 20 percent down. The difference is usually less than 0.5 percent. The bigger factor in your rate is your credit score and the current market. Shop with multiple lenders to compare rates at different down payment levels.
What if the house appraises for less than the purchase price?
If the appraisal comes in lower than the agreed purchase price, your down payment percentage increases automatically. If you agreed to buy a $300,000 house with 10 percent down ($30,000) but it appraises for $280,000, you now have a 10.7 percent down payment. You can renegotiate the price with the seller, increase your down payment, or walk away depending on your contract terms.