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 rest of the purchase price is borrowed through a mortgage. Lenders require a down payment because it reduces their risk — if you walk away or stop paying, they have already recovered some of their money by selling the house.

The down payment also affects what you pay over the life of the loan. A larger down payment means you borrow less, which lowers your monthly payment and the total interest you pay. It can also determine whether you pay for mortgage insurance, which protects the lender if you default but costs you money each month.

Down payment amounts are expressed as a percentage of the home's purchase price. A 20 percent down payment on a $300,000 house means you pay $60,000 upfront and borrow $240,000. The percentage you put down depends on the type of loan, your credit score, and what you can afford to save.

Key Takeaways

  • Down payments typically range from 3 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 for mortgage insurance, which adds to your monthly housing cost.
  • FHA loans allow down payments as low as 3.5 percent, while conventional loans often require 5 to 20 percent.
  • Your down payment amount affects your interest rate, monthly payment, and total loan cost over 15 or 30 years.
  • Saving for a down payment takes planning, but first-time buyer programs and gifts from family can reduce the amount you need to save yourself.

Down payment ranges by loan type

Different loan programs have different minimum down payment requirements. An FHA loan, backed by the Federal Housing Administration, allows down payments as low as 3.5 percent of the purchase price. These loans are designed for first-time buyers and people with lower credit scores, but they require mortgage insurance for the life of the loan.

A conventional loan — the most common type, not backed by a government agency — typically requires 5 to 20 percent down. Lenders may offer better interest rates if you put down 20 percent or more, and you avoid mortgage insurance entirely at that threshold. With 5 to 19 percent down, you pay for mortgage insurance until you reach 20 percent equity in the home.

VA loans, available to military members and veterans, often require zero down payment. USDA loans, for rural properties, also allow zero down for borrowers who meet income limits. Both programs have their own insurance requirements and may be able to access rules.

How down payment size affects your monthly payment and total cost

A larger down payment directly lowers your monthly mortgage payment because you are borrowing less money. On a $300,000 house at current interest rates, putting down 3 percent ($9,000) instead of 20 percent ($60,000) means borrowing an extra $51,000. That difference adds roughly $300 to your monthly payment, plus the cost of mortgage insurance.

Over a 30-year loan, the difference compounds. You pay more interest on a larger loan balance, and if you have mortgage insurance, you pay that fee every month until you reach 20 percent equity. A smaller down payment can cost you tens of thousands of dollars in extra interest and insurance over the life of the loan.

However, a smaller down payment lets you buy sooner and build equity in a home instead of renting. The trade-off is higher monthly costs and more total interest paid. Your situation — how long you plan to stay in the house, current interest rates, and your ability to save — determines whether a smaller down payment makes sense for you.

Calculating how much to save

To find your target down payment, multiply the home price you are looking at by the percentage you plan to put down. If you want to buy a $250,000 house with 10 percent down, your down payment is $25,000. Add closing costs — typically 2 to 5 percent of the purchase price — which cover appraisals, inspections, title insurance, and lender fees. On a $250,000 purchase, closing costs might run $5,000 to $12,500.

Your total cash needed is down payment plus closing costs. In this example, you would need roughly $30,000 to $37,500. Some lenders allow you to roll closing costs into the loan or ask the seller to cover them, which reduces your upfront cash requirement. A mortgage lender can give you a detailed estimate once you are pre-approved.

Start by deciding what price range you can afford based on your income and debts, then work backward to find your down payment target. Many first-time buyers aim for 5 to 10 percent down as a balance between saving time and keeping monthly payments manageable.

First-time buyer programs and down payment help

Many states, cities, and nonprofits offer programs that reduce the down payment you need to save. These programs vary widely by location. Some provide grants (money you do not repay), others offer low-interest loans, and some combine both. Your state housing finance agency or local housing authority can tell you what programs exist in your area.

The National Housing Trust Fund and Community Development Block Grants fund down payment assistance in many regions, though the programs themselves are run locally. Nonprofits like NeighborWorks America also offer down payment help and homebuyer education classes in some areas. Employer programs, credit unions, and banks sometimes offer down payment matching or grants to employees.

Family gifts are another common source. Many loan programs allow a parent or relative to gift you money for a down payment without requiring you to repay it. The lender will ask for documentation that it is a gift, not a loan. This can significantly reduce the amount you need to save yourself.

Mortgage insurance and when you can remove it

Private mortgage insurance (PMI) is required on conventional loans when you put down less than 20 percent. It protects the lender, not you, and costs roughly 0.5 to 1.5 percent of your loan amount per year, added to your monthly payment. On a $240,000 loan, PMI might add $100 to $300 per month.

You can remove PMI once you reach 20 percent equity in the home through a combination of payments and home appreciation. You can request removal once you hit that threshold, or your lender may remove it automatically depending on your loan type and state law. This typically takes 5 to 10 years on a 30-year mortgage, though it happens faster if home values rise or you make extra payments.

FHA loans require mortgage insurance for the life of the loan if you put down less than 10 percent. If you put down 10 percent or more on an FHA loan, the insurance drops after 11 years. This is one reason conventional loans can be cheaper long-term if you can save 20 percent down.

Common mistakes when saving for a down payment

One frequent mistake is saving in the wrong account. Money you plan to use for a down payment should sit in a savings account or money market account where it is safe and accessible, not in stocks or other investments that could lose value right before you need it. Lenders also want to see that the money has been in your account for at least two months, so they know it is genuinely yours and not a borrowed loan.

Another mistake is making large purchases or taking on new debt while saving. A car loan, credit card balance, or personal loan increases your debt-to-income ratio, which lenders use to decide how much they will lend you. A higher ratio can lower the loan amount you may have access to for or raise your interest rate, sometimes by enough to offset the benefit of a larger down payment.

Waiting too long to get pre-approved is also common. Pre-approval shows you what price range you can actually afford and what your monthly payment will be. Many buyers save a down payment amount without knowing whether it is enough for the house they want in their market. Getting pre-approved early lets you save with a real target in mind.

Frequently Asked Questions

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

Some retirement accounts allow withdrawals for first-time home purchases. A traditional or Roth IRA lets you withdraw up to $10,000 lifetime for a first-time purchase without the early withdrawal penalty, though you still owe income tax on the amount. A 401(k) may allow a loan against your balance, which you repay with interest. Withdrawing from retirement savings reduces your long-term security, so explore other options first.

What if I do not have 20 percent saved — should I wait?

Not necessarily. Waiting to save 20 percent can take years, during which you pay rent instead of building equity. A 5 or 10 percent down payment with mortgage insurance may cost less over time than renting while you save. Run the numbers for your situation: compare your monthly rent plus utilities to a mortgage payment with insurance, then decide whether waiting makes sense.

Does the seller ever pay the down payment?

No, but the seller can contribute to your closing costs through a credit at closing. This reduces the cash you need upfront. The amount the seller can contribute varies by loan type — conventional loans typically allow 1 to 3 percent of the purchase price, while FHA loans allow up to 6 percent. This is negotiated as part of your offer.

How does my credit score affect the down payment I need?

A higher credit score can lower the down payment requirement and interest rate you may have access to for. Conventional lenders may require 10 to 20 percent down if your score is below 620, but allow 3 to 5 percent if it is above 740. FHA loans are more flexible with credit scores but require mortgage insurance. Improving your credit before applying can save you thousands in interest and insurance costs.

Can I borrow money for my down payment?

Most lenders do not allow borrowed money for down payments because it increases your debt and risk of default. Money must come from your own savings, gifts from family, or down payment assistance programs. If you borrow from a family member, document it as a gift in writing so the lender does not count it as a loan that affects your debt ratio.