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 lender finances the rest through a mortgage. If a house costs $300,000 and you put down $60,000, the lender gives you a $240,000 mortgage.

Lenders require a down payment because it reduces their risk. If you default on the loan, the lender can sell the house. A down payment means the house is worth more than what you owe, so the lender recovers their money. The larger your down payment, the less risk the lender takes — and the better terms you typically receive.

Down payment size also affects your monthly payment. A bigger down payment means a smaller loan, which means lower monthly mortgage payments. It also determines whether you pay private mortgage insurance (PMI), an extra monthly cost that protects the lender if you put down less than 20 percent.

Key Takeaways

  • Down payments typically range from 3 percent to 20 percent of the home's purchase price, depending on the loan type and your financial situation.
  • Putting down less than 20 percent usually means paying private mortgage insurance (PMI) each month until you reach 20 percent equity.
  • First-time homebuyer programs often allow down payments as low as 3 percent, while conventional loans without assistance usually require 5 to 10 percent.
  • Your down payment comes from your own savings — not from the loan — so you must have this money available before closing.
  • A larger down payment lowers your monthly payment and may get you a better interest rate, but it also means less cash left for repairs and emergencies after purchase.

Typical down payment amounts by loan type

FHA loans (Federal Housing Administration) allow down payments as low as 3.5 percent and are designed for first-time buyers or those with lower credit scores. You pay mortgage insurance premiums both upfront and monthly, regardless of how much you put down.

VA loans (for military members, veterans, and surviving spouses) often require zero down payment. You pay a one-time funding fee instead of mortgage insurance.

USDA loans (for rural properties) also allow zero down payment for borrowers who meet income limits. Like VA loans, they charge a funding fee rather than mortgage insurance.

Conventional loans (not backed by a government agency) typically require 5 to 20 percent down. With less than 20 percent down, you pay PMI. Some lenders offer conventional loans with 3 percent down, but these usually come with higher interest rates or require a larger cash reserve.

Down payment requirements vary by lender and by your credit score, debt-to-income ratio, and savings history. A lender may require 10 percent down if your credit is fair, but only 5 percent if your credit is strong.

The real cost of a smaller down payment

Putting down 3 or 5 percent instead of 20 percent means you borrow more money. On a $300,000 house, a 3 percent down payment ($9,000) leaves you financing $291,000. A 20 percent down payment ($60,000) leaves you financing $240,000. That $51,000 difference costs you tens of thousands in interest over 30 years.

You also pay private mortgage insurance (PMI) when you put down less than 20 percent. PMI typically costs 0.5 to 1.5 percent of your loan amount per year, split into monthly payments. On a $291,000 loan, that could be $145 to $435 per month. PMI drops off once you reach 20 percent equity in the home, but that takes years of payments.

A smaller down payment also leaves you with less cash cushion after closing. Closing costs (title insurance, appraisal, inspections, attorney fees) typically run 2 to 5 percent of the purchase price. If you put down 3 percent and spend most of your savings on closing costs, you have little left for a roof repair or furnace replacement in year two.

How to save for a down payment

Start by setting a target. Decide whether you want to aim for 3, 5, 10, or 20 percent down, then multiply that percentage by the price range of homes you are considering. If you want to buy a $250,000 house with 10 percent down, you need $25,000.

Open a separate savings account dedicated to your down payment. Automate transfers from each paycheck so the money moves before you can spend it. Even $200 or $300 per paycheck adds up over two or three years.

Some employers offer down payment assistance as part of their benefits package. Ask your HR department whether your company has a program. Some nonprofits and state housing finance agencies also offer down payment grants or forgivable loans for first-time buyers — these do not have to be repaid if you stay in the home for a set period.

Family gifts are another source. Many loan programs allow a parent or relative to gift you down payment money. The lender will ask for a gift letter stating the money is a gift, not a loan you must repay.

When a larger down payment makes sense

If you have saved 20 percent or more, putting it all down usually makes financial sense. You avoid PMI entirely, your monthly payment is lower, and you build equity faster. You also have more negotiating power with sellers and may get a better interest rate from the lender.

However, do not drain your emergency fund to maximize your down payment. Homeownership brings unexpected costs: a water heater fails, the roof leaks, the foundation cracks. Financial advisors typically recommend keeping three to six months of living expenses in savings after you close. If putting down 20 percent leaves you with less than that, a smaller down payment may be wiser.

If you are buying in a competitive market where homes sell quickly, a larger down payment can make your offer more attractive to sellers. It signals that you are a serious buyer and less likely to have financing fall through.

Down payment assistance programs

Many states and cities offer down payment assistance for first-time buyers. These programs vary widely in what they cover, who qualifies, and how much they provide. Some are grants (assistance programs), others are forgivable loans (you do not repay if you meet certain conditions), and some are second mortgages (you repay them over time).

Your state housing finance agency is the first place to look. Search "[your state] down payment assistance" or visit the National Council of State Housing Agencies website to find your state's agency. They maintain a list of active programs and can tell you which ones match your income, credit score, and location.

Nonprofit organizations like NeighborWorks America and local community development corporations also run down payment assistance programs. Your mortgage lender can point you toward programs they work with regularly.

Employer assistance is becoming more common. Tech companies, healthcare systems, and large employers sometimes offer down payment grants or matching programs to help employees buy homes in their service areas.

What happens if you do not have a down payment saved

You have options even if you have not saved much. FHA loans require only 3.5 percent down and accept credit scores as low as 580. VA and USDA loans require zero down. Some conventional lenders offer 3 percent down programs, though they typically charge a higher interest rate to offset the risk.

If your credit score is too low for any loan program right now, focus on improving it first. Pay down existing debt, make all payments on time for several months, and dispute any errors on your credit report. A 50-point improvement in your score can lower your interest rate by 0.25 to 0.5 percent, saving you thousands over the life of the loan.

If you need more time to save, that is also a valid choice. Waiting six months or a year to accumulate a larger down payment means lower monthly payments and less PMI. The housing market will still be there, and you will be in a stronger financial position.

Frequently Asked Questions

Can I borrow my down payment from someone?

Most loan programs do not allow you to borrow your down payment. The lender wants to see that you have skin in the game — your own money at risk. Family gifts are allowed and do not have to be repaid, but loans from family members typically disqualify you. Ask your lender before accepting any money.

What if I put down less than 20 percent — when does PMI go away?

PMI drops off automatically once you reach 20 percent equity in the home through a combination of your down payment and mortgage payments. On a $300,000 house with a 10 percent down payment, you reach 20 percent equity after several years of payments. You can also request removal once you hit 20 percent equity, though some lenders require you to wait a set period first.

Is it better to put down 5 percent or 10 percent?

Ten percent down means a smaller loan, lower monthly payments, and you reach 20 percent equity faster (so PMI ends sooner). Five percent down preserves more of your cash for emergencies and repairs after closing. The choice depends on your financial situation: if you have limited savings, 5 percent may be safer; if you have a solid emergency fund, 10 percent usually costs less over time.

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

Yes, 20 percent is the standard threshold for conventional loans. FHA loans charge mortgage insurance regardless of down payment size. VA and USDA loans do not require mortgage insurance at any down payment level, which is one reason they are popular with those groups.

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

Some retirement plans allow you to borrow against your balance or withdraw funds for a first-time home purchase. A 401(k) loan does not trigger taxes or penalties, but you must repay it. IRA withdrawals for first-time buyers allow up to $10,000 lifetime without penalty, but you still owe income tax on the withdrawal. Consult a tax professional before taking this step, as it reduces your retirement savings.