What a down payment is and why lenders require it

A down payment is the money you give the seller at closing — the cash you bring to the table, separate from the loan. If you buy a house for $300,000 and put down $60,000, you borrow $240,000. The lender wants to see you risk your own money first because it makes you less likely to walk away if the house loses value.

Lenders also use the down payment to calculate your loan-to-value ratio, or LTV. That ratio determines your interest rate, whether you need mortgage insurance, and sometimes whether you can borrow at all. A 20 percent down payment ($60,000 on a $300,000 house) is the traditional benchmark — below that, most lenders require you to pay for mortgage insurance, which protects them if you default.

The down payment also affects how much house you can afford. If you have $40,000 saved and put it all down, you may have access to for a smaller loan than if you put down $20,000 and keep $20,000 in reserve. Lenders look at your total debt and income, not just the house price.

Key Takeaways

  • Down payments range from 3 percent to 20 percent or more, depending on the loan type and your credit profile.
  • Putting down less than 20 percent usually means paying mortgage insurance, which adds to your monthly payment and total cost.
  • You can use savings, gifts from family, or proceeds from selling another property, but borrowed money typically does not count.
  • The down payment is separate from closing costs, which are additional fees you pay at closing and usually run 2 to 5 percent of the purchase price.
  • A larger down payment lowers your monthly payment and can may have access to you for a better interest rate.

How much down payment you need by loan type

The amount varies by the kind of mortgage. Conventional loans — the most common type, not backed by the government — typically require 3 to 20 percent down, depending on your credit score and debt-to-income ratio. If your credit is strong and your debt is low, some lenders will go as low as 3 percent. If your credit is weaker or your debt is higher, they may require 10 or 15 percent.

FHA loans, insured by the Federal Housing Administration, allow down payments as low as 3.5 percent. VA loans, for military members and veterans, often require zero down. USDA loans, for rural properties, also allow zero down for borrowers who meet income limits. Each of these government-backed programs has its own rules about credit score, debt, and property type.

Jumbo loans — for homes above the conventional loan limit, which varies by county but is often around $766,000 — usually require 10 to 20 percent down because they carry more risk for the lender. Portfolio loans, held by the lender rather than sold to investors, may have their own minimums.

Where down payment money can come from

Lenders want to see that the down payment is your own money, not borrowed. You can use savings, money from selling another property, or a gift from a family member. If you receive a gift, the giver must sign a letter stating it is a gift, not a loan — the lender will ask for this before closing.

Some employers offer down payment assistance programs. Some nonprofits and state housing agencies also run programs that provide grants or forgivable loans for down payments, usually for first-time buyers or low-income households. These vary widely by location and income level.

You cannot typically borrow the down payment from a credit card, personal loan, or another lender. If you do, the lender will see the new debt on your credit report and may deny your mortgage or require a larger down payment to offset the added risk. Some lenders allow you to borrow against a 401(k) or take a home equity loan against another property you own, but these have tax and financial consequences worth discussing with an accountant.

The cost of putting down less than 20 percent

When you put down less than 20 percent, lenders require mortgage insurance — a monthly fee added to your payment that protects the lender if you default. On a conventional loan, this is called PMI, or private mortgage insurance. On an FHA loan, it is called MIP, or mortgage insurance premium. On a VA or USDA loan, it is called a funding fee, paid upfront or rolled into the loan.

The cost depends on your down payment size, credit score, and loan amount. A 10 percent down payment typically costs 0.5 to 1 percent of the loan amount per year. A 5 percent down payment might cost 1 to 2 percent per year. On a $240,000 loan with a 10 percent down payment, mortgage insurance might add $100 to $240 per month. Over 30 years, that is $36,000 to $86,000 in extra cost.

On a conventional loan, you can remove PMI once you have paid the loan down to 80 percent of the original purchase price, or after 11 years if you stay current on payments. On an FHA loan, mortgage insurance stays for the life of the loan if you put down less than 10 percent, or for 11 years if you put down 10 percent or more. This is a real difference in total cost.

Down payment versus closing costs

The down payment and closing costs are separate. Closing costs are the fees you pay to the lender, title company, appraiser, and others involved in the transaction. They typically run 2 to 5 percent of the purchase price — on a $300,000 house, that is $6,000 to $15,000. Common closing costs include the loan origination fee, appraisal, title search, title insurance, homeowners insurance, property taxes, and attorney fees.

Some sellers will pay part or all of your closing costs as part of the negotiation. This is called a seller concession. If the seller pays your closing costs, you do not need to bring that money to closing, but you still need to bring the down payment. Lenders limit how much sellers can contribute — usually 3 to 6 percent of the purchase price, depending on your down payment size.

You can also roll some closing costs into the loan, which means borrowing the money instead of paying it upfront. This lowers your cash at closing but raises your monthly payment and total interest paid over the life of the loan.

How a larger down payment affects your monthly payment and interest rate

Every dollar you put down reduces the amount you borrow, which directly lowers your monthly payment. On a $300,000 house at 7 percent interest over 30 years, a $60,000 down payment (20 percent) means a monthly payment of about $1,330. A $30,000 down payment (10 percent) means a monthly payment of about $1,595, plus mortgage insurance of roughly $120 to $240 per month — so $1,715 to $1,835 total.

A larger down payment can also lower your interest rate. Lenders offer better rates to borrowers who put down more because they are taking on less risk. The difference is usually a quarter to half a percent, which sounds small but adds up. On a $240,000 loan, a 0.5 percent lower rate saves roughly $100 per month.

The trade-off is liquidity — cash you put down is no longer available for emergencies, home repairs, or other needs. Many financial advisors suggest keeping 3 to 6 months of expenses in savings before putting extra money toward a down payment. If you have high-interest debt, like credit card balances, paying that down before increasing your down payment often makes more financial sense.

Strategies for saving a down payment

If you do not have a down payment saved, you have several paths. The lowest-down programs — FHA at 3.5 percent, VA at zero, USDA at zero — require less upfront cash but may have higher monthly costs due to mortgage insurance or other fees. Conventional loans at 3 to 5 percent down are also available if your credit is good, though you will pay PMI.

Some first-time buyer programs offer down payment grants or forgivable loans. These are run by state housing finance agencies, nonprofits, and sometimes employers. The rules vary by location and income, so checking with your local housing authority or a HUD-approved housing counselor can point you toward programs in your area.

If you have time before buying, setting a savings goal and automating monthly transfers to a dedicated account makes the process easier. Even a small increase in your down payment — from 3 percent to 5 percent, or from 5 percent to 10 percent — can save thousands in mortgage insurance over the life of the loan.

Frequently Asked Questions

Can I use a gift for my down payment?

Yes. The giver must sign a gift letter stating it is a gift, not a loan you have to repay. The lender will ask for this letter before closing. There is no limit on gift amounts, and the giver does not have to be a family member, though some lenders prefer it.

What happens if I put down less than 3 percent?

Conventional loans typically do not go below 3 percent. If you have less saved, look at FHA (3.5 percent), VA (zero), or USDA (zero) loans. Some lenders also offer first-time buyer programs with 2 percent down, but these are less common and usually require good credit.

Can I remove PMI from my loan?

On a conventional loan, yes — once you have paid the principal down to 80 percent of the original purchase price, or after 11 years of on-time payments. On an FHA loan, mortgage insurance is permanent if you put down less than 10 percent. If you put down 10 percent or more on an FHA loan, it stays for 11 years.

Should I put down 20 percent to avoid mortgage insurance?

Not always. If you have the cash but also have high-interest debt or low savings, it may make more sense to put down 10 percent, pay mortgage insurance for a few years, and keep cash for emergencies. Run the numbers with a lender to compare your total cost under different scenarios.

Can the seller pay my down payment?

No. The down payment must come from your own funds or a gift. The seller can pay your closing costs (up to a limit set by the lender), but not your down payment. If a seller offers to pay your down payment, it is usually structured as a price reduction instead.