What a down payment is and why lenders require one

A down payment is the cash you put toward the purchase price of a home on the day you close. The rest comes from a mortgage loan. If a house costs $300,000 and you put down $60,000, you borrow $240,000. The down payment is yours to lose — if you stop paying the mortgage, the lender takes the house and keeps your down payment money.

Lenders require a down payment because it reduces their risk. A larger down payment means you have more of your own money at stake, which makes you statistically less likely to walk away or default. It also means the lender is financing a smaller portion of the home's value, so even if the house loses value and you default, they have a better chance of recovering their loan through a sale.

Down payment size also determines whether you'll pay private mortgage insurance (PMI) — an extra monthly cost that protects the lender if you default. PMI typically costs 0.5% to 1.5% of your loan amount per year, added to your monthly payment. You can avoid PMI by putting down 20% or more, but most first-time buyers put down less and accept PMI as a trade-off.

Key Takeaways

  • Down payments typically range from 3% to 20% of the home's purchase price, depending on the loan type and your financial situation.
  • Putting down less than 20% triggers private mortgage insurance (PMI), which adds to your monthly payment until you reach 20% equity.
  • Conventional loans, FHA loans, and VA loans have different minimum down payment requirements and different rules about PMI.
  • Your down payment comes from your own savings and cannot be borrowed, though some programs help cover part of it.
  • A larger down payment lowers your monthly payment and total interest paid, but it also means less cash left for closing costs and emergencies.

Minimum down payments by loan type

Conventional loans (the most common type, not backed by the government) typically require a minimum of 3% down. Some lenders will go as low as 3%, though a few require 5% or more. With 3% down on a $300,000 home, you'd put down $9,000 and borrow $291,000. You'd pay PMI because you're below the 20% threshold.

FHA loans (backed by the Federal Housing Administration) require a minimum of 3.5% down. These loans are designed for buyers with lower credit scores or less savings. The trade-off is that FHA loans charge mortgage insurance premiums that are typically higher than conventional PMI and harder to remove — you may pay them for the life of the loan if you put down less than 10%.

VA loans (for military members, veterans, and surviving spouses) often require zero down payment. This is one of the few loan types where you can finance 100% of the purchase price. There is no PMI on VA loans, though there is a one-time funding fee (usually 1.5% to 3.3% of the loan amount) that can be rolled into the mortgage.

USDA loans (for rural properties, for borrowers with moderate income) also require zero down payment. Like VA loans, they have no PMI but do charge a may provide fee that can be financed into the loan.

How down payment size affects your monthly payment and total cost

A larger down payment directly lowers your monthly mortgage payment because you're borrowing less money. On a $300,000 home at 7% interest over 30 years, putting down 3% ($9,000) means a loan of $291,000 and a monthly payment around $1,935 (before taxes, insurance, and PMI). Putting down 20% ($60,000) means a loan of $240,000 and a monthly payment around $1,596 — a difference of $339 per month.

Over the life of the loan, the difference is much larger. The 3% down scenario costs roughly $697,000 in total payments (principal plus interest plus PMI). The 20% down scenario costs roughly $574,000 in total payments. That's a $123,000 difference, even though you only put down an extra $51,000 upfront.

However, a larger down payment also means less cash in your pocket after closing. Closing costs (title insurance, appraisal, inspection, attorney fees, and other charges) typically run 2% to 5% of the purchase price — another $6,000 to $15,000 on a $300,000 home. If you put down 20% and pay 5% in closing costs, you've spent $75,000 before you own the house. That leaves less money for repairs, emergencies, or life changes.

Where down payment money comes from

Your down payment must come from your own savings or from a gift. You cannot borrow the down payment — lenders verify the source of funds and will reject a loan if you've borrowed money to cover it. The logic is the same as before: if you've borrowed to get into the house, you're more likely to default.

A gift from a family member is allowed and common. The gift-giver does not need to be repaid, and the money does not need to be paid back. Most lenders require a signed gift letter stating that the money is a gift, not a loan. Some lenders limit gifts to a percentage of the down payment or require that you contribute a minimum amount of your own money (often 3% to 5% of the purchase price).

Some employers, nonprofits, and government programs offer down payment assistance — grants or forgivable loans that cover part or all of your down payment. These vary widely by location and employer. A forgivable loan is one that you don't have to repay if you stay in the home for a set period (often 5 to 10 years). These programs are not common, but they exist; a mortgage lender or local housing authority can tell you whether any are available in your area.

The trade-off between down payment size and financial flexibility

Putting down the minimum (3% to 3.5%) keeps more cash in your savings account. This is useful if you're uncertain about your job, if you know the house needs repairs, or if you want a financial cushion for emergencies. The cost is a higher monthly payment and PMI. If you can afford the higher payment and you're confident in your income, the math often favors a smaller down payment — you keep your cash liquid and can invest it elsewhere or use it for home repairs.

Putting down 20% or more eliminates PMI and lowers your monthly payment, but it requires more cash upfront and leaves less for closing costs and emergencies. This approach makes sense if you have substantial savings, a stable income, and you're confident the house won't need major repairs in the first few years.

Many buyers split the difference and put down 10% to 15%. This reduces PMI compared to 3% down, lowers the monthly payment compared to 3% down, and still leaves a reasonable cash cushion. The exact right amount depends on your savings, your income stability, and your comfort with debt.

How to remove PMI once you've built equity

If you put down less than 20%, you'll pay PMI until you reach 20% equity in the home (meaning you've paid down the loan to 80% of the original purchase price). On a conventional loan, you can request PMI removal once you hit 20% equity, either through regular payments or through home appreciation. Some lenders will remove it automatically once you reach 20% equity; others require you to ask.

The timeline depends on your down payment, interest rate, and how quickly home values rise in your area. If you put down 5% and make regular payments, you might reach 20% equity in 8 to 12 years. If the home appreciates significantly, you could reach it faster. You can also reach 20% equity faster by making extra principal payments.

FHA loans are different. If you put down less than 10%, you'll pay mortgage insurance for the life of the loan — there's no removal option. If you put down 10% or more, you can request removal after 11 years of payments. This is one reason FHA loans are less attractive for buyers who plan to stay in the home long-term.

Frequently Asked Questions

Can I use a credit card or personal loan for my down payment?

No. Lenders verify the source of all funds and will reject a loan if you've borrowed money to cover the down payment. A gift from a family member is allowed, but borrowed money is not. The lender's concern is that if you've already taken on debt to buy the house, you're more likely to default.

What happens if I put down less than 3%?

Most conventional lenders require a minimum of 3% down. Some lenders offer 2% or 1% down programs, but these are rare and typically require a higher credit score, a larger cash reserve, or both. FHA loans go as low as 3.5%, and VA and USDA loans allow zero down. Ask your lender what minimums they offer.

Does a larger down payment help me get approved?

Yes, generally. A larger down payment reduces the lender's risk and can help you get approved if your credit score or income is borderline. It can also help you negotiate a better interest rate. However, approval depends on many factors — your credit score, debt-to-income ratio, employment history, and the home's appraisal all matter.

Can I put down more than 20% to avoid PMI?

Yes. Putting down 20% or more eliminates PMI entirely. Some buyers put down 25%, 30%, or more if they have the savings and want to minimize their monthly payment and total interest paid. There's no penalty for putting down more than 20%.

What if my home appreciates and I reach 20% equity faster?

If your home's value rises and you reach 20% equity through appreciation (rather than through payments), you can request PMI removal on a conventional loan. You'll typically need a new appraisal to prove the home's current value, which costs $300 to $500. Some lenders will remove PMI automatically once you reach 20% equity; others require you to request it in writing.