What a down payment is and how much you typically need
A down payment is the cash you give the lender upfront when you buy a house. The rest of the purchase price becomes your mortgage loan. The amount you put down affects your monthly payment, your interest rate, and whether you'll pay mortgage insurance.
Down payments range from 3% to 20% of the home's purchase price, depending on the loan type and your financial situation. A $300,000 house with a 10% down payment means you pay $30,000 upfront and borrow $270,000. With a 20% down payment on the same house, you pay $60,000 upfront and borrow $240,000.
The larger your down payment, the smaller your monthly mortgage payment and the less interest you pay over the life of the loan. A larger down payment also means you avoid private mortgage insurance (PMI), which lenders require when you put down less than 20%.
Key Takeaways
- Down payments typically range from 3% to 20% of the home price, with the exact amount depending on your loan type and lender requirements.
- Putting down less than 20% means you'll pay private mortgage insurance (PMI) on top of your regular mortgage payment until you reach 20% equity.
- FHA loans allow down payments as low as 3.5%, while conventional loans often require 5% to 10% minimum, though some programs go lower.
- Your down payment amount directly affects your monthly payment, interest rate, and total interest paid over the loan term.
- Saving for a larger down payment takes time, but reduces your borrowing costs and can improve your loan terms.
How down payment size affects your monthly payment and interest rate
A larger down payment lowers your monthly mortgage payment because you're borrowing less money. On a $300,000 house at 7% interest over 30 years, a 10% down payment ($30,000) results in a monthly payment around $1,896 (before taxes and insurance). A 20% down payment ($60,000) on the same house results in a monthly payment around $1,596.
Down payment size also affects your interest rate. Lenders view borrowers who put down more money as lower risk, so they often offer better rates to those with larger down payments. The difference might be 0.25% to 0.5% in interest rate, which compounds over 30 years into thousands of dollars in savings.
When you put down less than 20%, lenders require PMI to protect themselves if you stop paying. PMI typically costs 0.5% to 1.5% of your loan amount per year, added to your monthly payment. On a $270,000 loan, PMI might add $112 to $337 per month. You can stop paying PMI once you reach 20% equity in the home through a combination of payments and home appreciation.
Down payment requirements by loan type
FHA loans (backed by the Federal Housing Administration) allow down payments as low as 3.5% of the purchase price. These loans are designed for first-time buyers and people with lower credit scores. You'll pay mortgage insurance for the life of the loan if you put down less than 10%, which makes the monthly cost higher than conventional loans.
Conventional loans (not backed by the government) typically require 5% to 10% down, though some lenders offer 3% down programs. Conventional loans with less than 20% down require PMI, but you can remove it once you reach 20% equity. Interest rates on conventional loans are often lower than FHA loans if you have good credit.
VA loans (for military members and veterans) often allow 0% down payment with no PMI requirement. USDA loans (for rural properties) also allow 0% down with no PMI. Both programs have specific may be able to access requirements and geographic restrictions.
Calculating your down payment based on home price
To find your down payment amount, multiply the home's purchase price by your down payment percentage. A $250,000 home with a 10% down payment means $250,000 × 0.10 = $25,000. A $400,000 home with a 5% down payment means $400,000 × 0.05 = $20,000.
Your down payment is separate from closing costs, which typically run 2% to 5% of the purchase price. Closing costs cover appraisals, inspections, title insurance, attorney fees, and lender fees. You need to budget for both the down payment and closing costs when planning to buy.
Some lenders allow you to roll closing costs into your loan, but this increases your total borrowing and monthly payment. Others let you ask the seller to cover part of closing costs as part of the negotiation, which reduces your out-of-pocket cash at closing.
Options if you don't have a large down payment saved
If you have 3% to 5% saved, FHA loans and some conventional programs let you buy now rather than wait years to save 20%. You'll pay PMI or mortgage insurance, but you build equity in the home while you own it. As your home appreciates and you pay down the loan, you eventually reach 20% equity and can remove PMI.
Some employers, nonprofits, and state programs offer down payment assistance grants or forgivable loans that don't have to be repaid. These are most common for first-time buyers in certain income ranges or geographic areas. Your lender or a local housing counselor can tell you what programs exist in your area.
Borrowing from family members is another route. Some lenders allow a family gift to cover part or all of your down payment, though they require a signed letter stating it's a gift, not a loan you have to repay. The gift must come from someone with a financial interest in your wellbeing (parent, grandparent, sibling), not from an unrelated person.
The trade-off between down payment size and monthly affordability
A larger down payment means lower monthly payments, but it also means more cash tied up in the house upfront. If you put $60,000 down instead of $30,000, you have $30,000 less available for emergencies, home repairs, or other needs. Lenders want to see that you have cash reserves after closing, so putting down every penny you have can hurt your loan approval.
The conventional wisdom that 20% down is always best doesn't account for your personal situation. If you have stable income, an emergency fund, and can afford PMI, a 5% or 10% down payment lets you buy sooner and keep cash on hand. If you have the money saved and want to minimize long-term interest costs, a larger down payment makes sense.
Consider your timeline and goals. If you plan to stay in the home for 10+ years, PMI costs are worth it to buy sooner. If you expect to move within 5 years, the PMI you pay might exceed the benefit of waiting to save more. Run the numbers with a lender to see what makes sense for your situation.
Frequently Asked Questions
Can I use a gift from family for my down payment?
Yes, most lenders allow family gifts to count toward your down payment. The gift giver must sign a letter stating it's a gift and not a loan you have to repay. Some lenders limit gifts to a percentage of the down payment or require the gift to come from a close relative, so check with your lender first.
What happens if I put down less than 3%?
Most conventional loans require at least 3% down, and FHA loans require 3.5%. VA and USDA loans allow 0% down if you meet may be able to access requirements. If you have less than 3% saved, explore whether you may have access to for VA, USDA, or down payment assistance programs in your area.
Can I remove PMI from my loan?
Yes, once you reach 20% equity in your home, you can request PMI removal on most conventional loans. Equity builds through your monthly payments and home appreciation. You may need to request removal in writing and provide proof of the home's current value through an appraisal.
Does a bigger down payment may provide loan approval?
A larger down payment helps, but lenders also look at your credit score, income, debt-to-income ratio, and employment history. A 20% down payment doesn't may provide approval if your credit is poor or your debt is too high. Lenders want to see that you can afford the monthly payment, not just that you have cash upfront.
Should I delay buying to save for a 20% down payment?
That depends on your situation. If home prices and interest rates are rising faster than you can save, buying sooner with PMI might cost less overall. If you're in a stable market and can save 20% in a year or two, waiting might make sense. Compare the cost of PMI over time against the cost of waiting to buy.