What a down payment is and why lenders require one

A down payment is the money you put toward the purchase price on the day you close. The rest comes from a mortgage loan. Lenders require a down payment because it reduces their risk — if you stop paying, they can foreclose and sell the house, but they want to know you have skin in the game first.

Down payments range from 3% to 20% of the purchase price on conventional loans, though some programs go lower. A $300,000 house with a 10% down payment means you pay $30,000 upfront and borrow $270,000. The lower your down payment, the higher your monthly payment and the more interest you pay over the life of the loan.

Putting down less than 20% triggers private mortgage insurance (PMI), a monthly fee added to your payment that protects the lender if you default. PMI typically costs 0.5% to 1.5% of the loan amount per year, divided into monthly payments. You can remove PMI once you've paid down the loan to 80% of the home's value, but that takes years on most mortgages.

Key Takeaways

  • Down payments typically range from 3% to 20% of the purchase price, and anything below 20% requires you to pay private mortgage insurance each month.
  • Closing costs — which include appraisal, title search, inspections, and lender fees — usually run 2% to 5% of the purchase price and are separate from your down payment.
  • You can sometimes roll closing costs into your mortgage or ask the seller to cover part of them, but both options have trade-offs.
  • FHA loans allow down payments as low as 3.5%, and some first-time buyer programs offer down payment help through grants or forgivable loans.
  • Your total cash needed at closing includes both the down payment and closing costs, so budget for both when saving.

How much cash you need at closing: down payment plus closing costs

Your down payment is not the only money you hand over on closing day. Closing costs are fees for the services and paperwork required to transfer the house to your name. These include the appraisal, title search, title insurance, home inspection, survey, attorney fees, lender origination fees, and property taxes or homeowners insurance prorated to your move-in date.

Closing costs typically run 2% to 5% of the purchase price. On a $300,000 house, that's $6,000 to $15,000 on top of your down payment. The exact amount depends on your location, the lender, and what services the seller agrees to cover. You'll receive a Closing Disclosure three days before closing that itemizes every fee.

Some costs are negotiable. You can shop for title insurance, homeowners insurance, and the appraisal. Others — like recording fees or transfer taxes — are set by your county or state. Ask your lender for a Loan Estimate early in the process so you know what to expect and can compare offers from different lenders.

Down payment programs and where to find them

If you don't have 20% saved, you have options. FHA loans, backed by the Federal Housing Administration, allow down payments as low as 3.5% and accept lower credit scores than conventional loans. The trade-off is that FHA loans require mortgage insurance for the life of the loan, not just until you reach 80% equity.

VA loans, for military members and veterans, often require no down payment at all and no mortgage insurance. USDA loans for rural properties also offer zero-down financing. Both have specific may be able to access rules and geographic or income limits.

Many states and cities run first-time homebuyer programs that offer down payment grants or forgivable loans — money you don't have to repay if you stay in the house for a set period. Your local housing authority or a nonprofit housing counselor can tell you what's available in your area. Some employers and credit unions also offer down payment assistance to members.

Rolling closing costs into your mortgage or asking the seller to pay

If you're short on cash, you can sometimes avoid paying closing costs upfront. A no-closing-cost mortgage rolls those fees into your loan balance, so you borrow more and pay interest on the closing costs over 15 or 30 years. This works if you have enough income to may have access to for a larger loan and plan to stay in the house long enough for the math to work out.

The downside is real: rolling $10,000 in closing costs into a 30-year mortgage at 7% interest means you'll pay roughly $23,000 by the end. You're also borrowing against your home's equity from day one, which means you build equity more slowly.

Another option is to ask the seller to cover part or all of your closing costs as part of the purchase negotiation. Sellers sometimes agree, especially in a buyer's market. However, the lender will require the purchase price to be reasonable for the property — they won't let you inflate the price just to have the seller pay your costs. Your real estate agent can advise on what's realistic in your market.

How down payment size affects your monthly payment and total interest

A larger down payment lowers your monthly mortgage payment and the total interest you pay. Here's why: you're borrowing less money, so the interest compounds on a smaller balance.

On a $300,000 house at 7% interest over 30 years, a 3% down payment ($9,000) means a loan of $291,000 and a monthly payment around $1,935 before taxes and insurance. A 20% down payment ($60,000) means a loan of $240,000 and a monthly payment around $1,596. That's $339 less per month, or about $122,000 less over 30 years. You also avoid PMI, which saves another $100 to $200 per month depending on the loan size.

However, putting down 20% means waiting longer to buy or tying up money that could go elsewhere. If you can earn more in investments than you pay in interest and PMI, a smaller down payment may make sense. A financial advisor can help you weigh this trade-off for your situation.

Saving for a down payment: realistic timelines and strategies

How long it takes to save depends on your income and how much you need. If you're aiming for 10% down on a $300,000 house, that's $30,000. Saving $500 per month takes five years; $1,000 per month takes two and a half years.

Some people open a dedicated savings account and automate transfers so the money moves before they see it. Others use a high-yield savings account to earn interest while saving. A few strategies to consider: cutting discretionary spending, picking up a second income source, or waiting for a raise or bonus to redirect toward the down payment.

If you're buying soon and short on cash, look into down payment assistance programs in your area before assuming you have to wait. Many programs exist specifically because saving 20% is unrealistic for most first-time buyers, and lenders have products designed for smaller down payments.

What happens if you can't save the full down payment

Not having 20% down doesn't mean you can't buy. Conventional loans go as low as 3% down. FHA loans go to 3.5%. VA and USDA loans go to zero. The trade-off is PMI on conventional and FHA loans, which increases your monthly payment.

You can also buy with a co-borrower — a family member or spouse who adds their income and credit to the application. This can help you may have access to for a larger loan or a better interest rate, though you're both legally responsible for repayment.

Another path is to buy a less expensive property now, build equity, and move up later. A $200,000 house with a 10% down payment ($20,000) is easier to save for than a $300,000 house, and after a few years of payments, you'll have more equity to use toward your next purchase.

Frequently Asked Questions

Can I borrow my down payment from family or a credit card?

Lenders allow down payment gifts from family members if you document them in writing and the family member signs a statement saying it's a gift, not a loan. However, most lenders won't let you borrow the down payment from a credit card or personal loan — they see it as debt that affects your ability to repay the mortgage.

What if I put down less than 3%?

Conventional loans don't go below 3% down. Some state and local first-time buyer programs offer 0% or 1% down, but they're limited to specific income levels or property types. Your lender can tell you what's available in your area.

Do I have to pay closing costs if I refinance?

Yes, refinancing involves new closing costs similar to a purchase, though sometimes lower. A refinance makes sense only if the interest rate drop or new loan terms save you more than the closing costs over the time you plan to stay in the house.

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

Some retirement plans allow loans or withdrawals for a first home purchase, but you'll face taxes and penalties if you don't follow the rules. Consult a tax professional or your plan administrator before withdrawing — the rules vary by plan type.

What if the appraisal comes in lower than the purchase price?

If the house appraises for less than you agreed to pay, your loan amount drops, which means you need a larger down payment to make up the difference. You can renegotiate the price with the seller, pay the difference out of pocket, or walk away depending on your contract terms.