What a down payment is and why lenders care about it

A down payment is the money you put toward the purchase price on the day you close on a house. The rest comes from a mortgage loan. If a house costs $300,000 and you put down $60,000, you borrow $240,000. Lenders care about the down payment because it shows you have skin in the game — if you stop paying the mortgage, the lender loses money before you do, which makes them more cautious about who they lend to and on what terms.

The size of your down payment affects three things: how much you can borrow, what interest rate you get offered, and whether you pay mortgage insurance. A larger down payment usually means a lower interest rate and no insurance requirement. A smaller down payment means you pay more over the life of the loan, sometimes significantly more.

Key Takeaways

  • Down payments typically range from 3% to 20% of the purchase price, depending on the loan type and your financial situation.
  • Putting down less than 20% usually means paying mortgage insurance (PMI), which adds to your monthly payment until you reach 20% equity.
  • FHA loans allow down payments as low as 3.5%, VA loans may require no down payment, and conventional loans typically start at 3% to 5%.
  • Your down payment comes from your own savings — not from the loan itself — and you need to show proof of where the money came from.
  • Closing costs (separate from down payment) typically run 2% to 5% of the purchase price and are due at closing.

Common down payment amounts by loan type

The minimum down payment depends on which type of mortgage you use. Conventional loans (not backed by a government agency) typically require 3% to 5% down, though some lenders go as low as 3% and others require 10% or more. FHA loans (backed by the Federal Housing Administration) allow 3.5% down and are common for first-time buyers with lower credit scores. VA loans (for military members, veterans, and surviving spouses) often require zero down payment. USDA loans (for rural properties) also allow zero down for borrowers who meet income limits.

Many buyers put down 20% because it eliminates mortgage insurance and often qualifies them for better interest rates. But 20% is not a requirement — it is a threshold where the math changes. A buyer with $60,000 saved for a $300,000 house (20% down) will have a lower monthly payment and no insurance. A buyer with $15,000 saved (5% down) on the same house will have a higher monthly payment because of the insurance cost, but can still buy.

How mortgage insurance works and what it costs

Mortgage insurance (called PMI on conventional loans, MIP on FHA loans) protects the lender if you default. It is not optional when you put down less than 20% on a conventional loan or less than 10% on an FHA loan — it is built into your monthly payment. On a conventional loan, PMI typically costs 0.5% to 1.5% of the loan amount per year, divided into monthly payments. On a $240,000 loan, that could be $100 to $300 per month.

You can stop paying PMI once you reach 20% equity in the home (through a combination of down payment and principal paid down). On an FHA loan, mortgage insurance is permanent if you put down less than 10%, and you pay it for the life of the loan. This is a real cost difference between loan types, and it matters when you are deciding how much to put down.

Calculating what you can afford to put down

Start with how much you have saved and how much you need to keep in reserve. Most lenders want to see that you have savings left after closing — typically enough to cover two to six months of mortgage payments, property taxes, insurance, and HOA fees if applicable. If you drain every dollar into a down payment, lenders see you as riskier and may deny the loan or offer worse terms.

Next, factor in closing costs, which are separate from your down payment. Closing costs typically run 2% to 5% of the purchase price and cover things like the appraisal, title search, attorney fees, and lender fees. On a $300,000 house, closing costs could be $6,000 to $15,000. You need cash for both the down payment and the closing costs, and ideally some emergency fund left over.

A practical example: if you have $50,000 saved and are buying a $300,000 house, you might put $15,000 down (5%), set aside $10,000 for closing costs, and keep $25,000 as a reserve. This leaves you with a manageable down payment, covers closing, and gives you a cushion if the furnace breaks in month two of ownership.

Down payment assistance programs and where to find them

Some states, counties, and nonprofits offer down payment help for first-time buyers or buyers in certain income ranges. These programs vary widely — some are grants (money you do not repay), some are forgivable loans (you repay only if you sell within a certain time), and some are second mortgages at favorable rates. Your state housing finance agency website lists programs available in your area. The National Council of State Housing Agencies (NCSHA) maintains a directory by state.

Employer programs also exist; some large employers offer down payment matching or loans to employees buying homes. Ask your HR department. Credit unions sometimes offer down payment assistance to members. These programs have income limits and other rules, and they fill up or close periodically, so timing matters.

What lenders ask about your down payment money

Lenders require a gift letter if someone else gave you money for the down payment. The letter must state that the money is a gift, not a loan you have to repay, and it must be signed by the person who gave it. If you borrowed the down payment money, lenders will usually deny the loan because you would owe two debts on the same house. The only exception is a second mortgage or a down payment assistance loan, which the lender knows about and approves.

You will also need to show bank statements or other proof that the money has been in your account for a certain period — usually 60 days. This is called the "seasoning period" and it prevents fraud. If you suddenly deposit a large sum, lenders want to know where it came from. Inheritance, sale of a car, or a bonus at work are all acceptable; they just need documentation.

Frequently Asked Questions

Can I borrow my down payment from family?

Not in a way that counts as a loan. If family gives you money as a gift, you need a signed gift letter stating it does not have to be repaid. If it is a loan, lenders will count it as debt you owe, which reduces how much they will lend you for the mortgage. Some down payment assistance programs are structured as loans, but the lender approves them as part of the mortgage process.

What happens if I put down less than 3%?

Most lenders will not go below 3% on a conventional loan. FHA loans go to 3.5%. If you have less than 3% saved, you would need to wait and save more, look for a down payment assistance program, or explore VA or USDA loans if you are may be able to access. Some first-time buyer programs may also have options.

Do I have to put down 20% to avoid mortgage insurance?

On a conventional loan, yes — 20% is the threshold where PMI stops. On an FHA loan, you need 10% down to avoid mortgage insurance for the life of the loan; below 10%, you pay it permanently. VA and USDA loans do not require mortgage insurance at any down payment level.

Can I use my retirement account for a down payment?

Some retirement accounts allow withdrawals for a first home purchase. A traditional or Roth IRA allows up to $10,000 lifetime withdrawal for a first-time buyer. A 401(k) may allow a loan against your balance. These come with tax and penalty rules, so talk to a tax professional or financial advisor before withdrawing. The money still needs to be documented and seasoned like any other down payment source.

What if I can only afford a small down payment — will I be denied?

Not automatically. A 3% down payment is common and lenders expect to see mortgage insurance on it. Your credit score, income, and debt matter more than the down payment size. A buyer with excellent credit and stable income may get approved with 3% down; a buyer with lower credit may need 5% or 10%. The down payment is one factor among several.