What a down payment is and why lenders require one

A down payment is the money you give the seller upfront when you buy a home. The rest of the purchase price becomes a loan from the lender, which you repay over time with interest. Lenders require a down payment because it reduces their risk — if you stop paying the mortgage, they can sell the house, and your down payment cushions them against a loss if the sale price drops.

Down payments typically range from 3% to 20% of the home's purchase price, though the exact amount depends on the loan type, your credit history, and the lender's requirements. A larger down payment usually means a lower monthly payment and no requirement to buy mortgage insurance, which protects the lender if you default.

Key Takeaways

  • Down payments are usually 3% to 20% of the home price, and the amount you put down affects your monthly payment and whether you need mortgage insurance.
  • Conventional loans typically require 5% to 20% down, while FHA loans allow as little as 3.5% down but require mortgage insurance regardless of the amount.
  • Putting down less than 20% on a conventional loan triggers PMI (private mortgage insurance), which adds to your monthly cost until you reach 20% equity.
  • Down payment funds can come from savings, gifts from family members, or first-time homebuyer programs, but lenders will ask where the money came from.
  • The down payment is separate from closing costs, which are additional fees paid at the time of purchase and typically run 2% to 5% of the loan amount.

How down payment size affects your loan and monthly payment

The larger your down payment, the smaller the loan you need to borrow. A smaller loan means a lower monthly mortgage payment and less total interest paid over the life of the loan. For example, on a $300,000 home, a 10% down payment ($30,000) means you borrow $270,000, while a 20% down payment ($60,000) means you borrow only $240,000.

Down payment size also determines whether you must buy private mortgage insurance (PMI). If you put down less than 20% on a conventional loan, the lender requires PMI to protect themselves. PMI typically costs 0.5% to 1.5% of the loan amount per year, added to your monthly payment. Once you reach 20% equity in the home — through a combination of down payment and principal paid over time — you can request to stop paying PMI, though the process and timeline vary by lender.

Down payment requirements by loan type

Conventional loans (not backed by a government agency) usually require a minimum down payment of 3% to 5%, though some lenders ask for 10% or more. With less than 20% down, you pay PMI. The exact requirement depends on your credit score, debt-to-income ratio, and the lender's standards.

FHA loans (insured by the Federal Housing Administration) allow down payments as low as 3.5% of the purchase price. However, FHA loans require mortgage insurance regardless of your down payment size. You pay an upfront mortgage insurance premium (usually 1.75% of the loan amount) at closing, plus an annual premium added to your monthly payment. This insurance stays on the loan for the full term if you put down less than 10%.

VA loans (for may be able to access military members and veterans) often require no down payment at all, though you still pay a funding fee. USDA loans (for rural homebuyers) also typically require no down payment. Both programs have their own insurance or may provide requirements.

Where down payment money comes from

Lenders will ask you to document where your down payment funds came from. The most straightforward sources are your own savings accounts, which you can show through bank statements. If you have been saving for several months, bring statements covering that period to show the funds are genuinely yours.

Down payment money can also come from a gift from a family member. Lenders allow this, but they require a signed gift letter from the person giving you the money, stating that it is a gift and not a loan you must repay. The gift letter protects the lender because it shows you are not taking on additional debt. Some lenders limit gifts to a percentage of the down payment or require that you contribute some of your own funds as well.

Some first-time homebuyers use down payment information programs run by nonprofits, local housing authorities, or state agencies. These programs may offer grants (money you do not repay) or forgivable loans (loans that disappear if you stay in the home for a set period). Requirements and amounts vary widely by location and program.

Down payment versus closing costs

The down payment and closing costs are separate expenses, and both are due at closing. The down payment is your contribution toward the purchase price. Closing costs are fees paid to third parties — the lender, title company, appraiser, inspector, and others — for services related to the loan and sale. Closing costs typically run 2% to 5% of the loan amount.

Some closing costs are paid by the seller, some by the buyer, and some are negotiable. Your lender will provide a Closing Disclosure form at least three business days before closing, itemizing all costs. It is important to budget for both the down payment and closing costs when planning to buy a home, as you will need both amounts in cash at closing.

How to save for a down payment

Saving for a down payment takes time, but breaking it into smaller goals makes it manageable. Start by determining the home price you are targeting and the down payment percentage you want to reach — even 5% or 10% is a realistic starting point. Then calculate the dollar amount and divide it by the number of months until you plan to buy.

Open a separate savings account dedicated to your down payment fund, so the money is not mixed with everyday spending. Set up automatic transfers from your checking account each payday. Track your progress monthly and adjust your timeline or target amount as needed. If you are a first-time homebuyer, research down payment information programs in your state or county — many offer grants or low-interest loans that can reduce the amount you need to save.

What happens if you cannot save 20% down

Putting down less than 20% is common and does not disqualify you from buying a home. Most first-time homebuyers put down 5% to 10%. The trade-off is that you will pay PMI (on conventional loans) or mortgage insurance (on FHA loans), which increases your monthly payment. However, PMI on a conventional loan can be removed once you reach 20% equity, so it is not permanent.

If saving for a down payment is difficult, consider whether an FHA loan makes sense for your situation. FHA loans allow 3.5% down and have more flexible credit requirements than conventional loans, though the mortgage insurance costs more upfront. You can also explore down payment information programs, which may cover part or all of your down payment in your area.

Frequently Asked Questions

Can I use a 401(k) or IRA to pay for a down payment?

Some retirement accounts allow withdrawals for a first-time home purchase. A traditional or Roth IRA lets you withdraw up to $10,000 lifetime for a first-time home purchase without the usual early withdrawal penalty, though you still owe income tax on the amount. A 401(k) may allow a loan against your balance rather than a withdrawal. Consult a tax professional before withdrawing, as the rules are complex and vary by account type.

What if the home appraises for less than the purchase price?

If the appraisal comes in lower than the agreed purchase price, you have a few options: renegotiate the price with the seller, make up the difference in cash, or walk away if your loan contract allows it. The lender will not lend more than the appraised value, so your down payment percentage may need to increase to cover the gap.

Do I have to put down 20% to avoid PMI?

On a conventional loan, yes — 20% down eliminates the PMI requirement. On an FHA loan, mortgage insurance is required regardless of your down payment size. Some lenders offer conventional loans with PMI at lower down payments (5% to 10%), which may be cheaper than an FHA loan depending on your credit score and the specific rates offered.

Can the seller help pay my down payment?

Sellers can contribute to closing costs in most cases, but down payment information from the seller is treated differently by lenders and may not be allowed on all loan types. Discuss this with your lender before negotiating with the seller, as it affects how much you can borrow and the terms of your loan.

What if I do not have any savings for a down payment?

Several paths exist: look for down payment information programs through your city, county, or state housing authority; explore nonprofit organizations that offer down payment grants; consider a gift from a family member with a signed gift letter; or delay your purchase to save. Some employers and credit unions also offer down payment help programs for employees or members.