What a Down Payment Is and How Much You Actually Need
What a down payment is and why lenders require one
A down payment is money you give to the seller or lender upfront when you buy a house. It comes from your own savings, not from the loan. If you buy a house for $300,000 and put down $60,000, the lender gives you a loan for the remaining $240,000. You then repay that loan over 15, 20, or 30 years.
Lenders require a down payment because it reduces their risk. If you walk away from the house, they own a property worth more than what they lent you. The larger your down payment, the less risk the lender takes, which is why larger down payments often come with better interest rates and lower monthly payments.
Down payments are expressed as a percentage of the home's price. A 20% down payment on a $300,000 house is $60,000. A 5% down payment on the same house is $15,000. The percentage you put down determines what kind of loan you can get and what you will pay in fees.
Key Takeaways
- Down payments typically range from 3% to 20% of the home's price, depending on the loan type and your financial situation.
- Loans with down payments below 20% require mortgage insurance, which adds to your monthly payment and cannot be removed until you reach 20% equity.
- First-time homebuyer programs, down payment assistance programs, and gifts from family can reduce the amount you need to save yourself.
- Your down payment affects your interest rate, monthly payment, and total cost of the loan over its lifetime.
- The money you put down builds equity in the house immediately—it is yours, not the lender's.
How down payment size affects your loan and monthly payment
The size of your down payment changes three things: your loan amount, your interest rate, and whether you pay mortgage insurance. A smaller down payment means a larger loan, which means higher monthly payments. A larger down payment means a smaller loan and lower monthly payments.
If you put down less than 20%, lenders require you to pay private mortgage insurance (PMI). PMI protects the lender if you stop paying. It typically costs 0.5% to 1% of your loan amount per year, added to your monthly payment. On a $240,000 loan, PMI might add $100 to $200 per month. You cannot remove PMI until you have paid down the loan to 80% of the home's original value—which takes years, even with extra payments.
Interest rates also shift with down payment size. A borrower with a 20% down payment usually gets a lower interest rate than one with a 5% down payment. Over a 30-year loan, even a 0.5% difference in rate adds tens of thousands of dollars to what you pay.
Here is a concrete example: on a $300,000 house with a 30-year loan at 7% interest, a 20% down payment ($60,000) means a $1,596 monthly payment. A 5% down payment ($15,000) means a $1,995 monthly payment—nearly $400 more per month, plus PMI on top of that.
Down payment amounts for different loan types
The minimum down payment depends on the type of loan you get. Conventional loans (from banks and private lenders) usually require 3% to 20% down. FHA loans (backed by the Federal Housing Administration) allow 3.5% down. VA loans (for military members and veterans) allow 0% down. USDA loans (for rural properties) also allow 0% down.
Conventional loans with less than 20% down require PMI. FHA loans require mortgage insurance regardless of down payment size, though the insurance is structured differently and is called an FHA mortgage insurance premium (MIP). VA and USDA loans do not require PMI, which is one reason they are valuable for those who may have access to.
The loan type you can use depends on your income, credit score, military status, and the location and type of property. A mortgage lender can tell you which loans you may be able to use and what down payment each one requires.
Where down payment money comes from
Most people save for a down payment over months or years. But there are other sources: gifts from family members, down payment assistance programs, first-time homebuyer programs, and employer benefits.
Gifts from family are allowed by most lenders, but they come with rules. The money must be a true gift—the lender will ask for a signed letter from the family member stating that repayment is not expected. Some lenders limit how much of your down payment can be a gift; others allow 100% of it to be gifted. Ask your lender before accepting money from family.
Down payment assistance programs are run by state and local governments, nonprofits, and sometimes employers. These programs give money or loans specifically for down payments. Some are forgivable loans (you do not repay them if you stay in the house for a set number of years). Others are grants (you never repay them). may be able to access depends on income, credit score, first-time homebuyer status, and location. Your mortgage lender or a local housing counselor can point you toward programs in your area.
First-time homebuyer programs often include down payment help. These are offered by state housing finance agencies, local housing authorities, and nonprofits. They may also offer lower interest rates or reduced closing costs alongside down payment funds.
Employer benefits sometimes include down payment assistance. Ask your human resources department whether your employer offers this.
Closing costs are separate from your down payment
Your down payment is not the only money you need at closing. Closing costs are fees paid to the lender, title company, appraiser, inspector, and other parties involved in the sale. They typically range from 2% to 5% of the home's price.
On a $300,000 house, closing costs might be $6,000 to $15,000. This is money separate from your down payment. If you put down $60,000 and closing costs are $10,000, you need $70,000 in cash at closing.
Some down payment assistance programs cover closing costs as well as the down payment. Some lenders allow you to roll closing costs into your loan, which means you borrow the money instead of paying it upfront. Ask your lender what your options are.
How to figure out what down payment you can afford
Start by looking at your savings and asking whether you can afford to set aside money for a down payment without leaving yourself with no emergency fund. A common rule is to keep three to six months of living expenses in savings for emergencies. If you drain your savings for a down payment and then face a car repair or job loss, you could fall behind on your mortgage.
Next, talk to a mortgage lender about what you can borrow. They will look at your income, debts, and credit score and tell you the maximum loan amount you may have access to for. From there, you can work backward: if you can borrow $240,000 and you want to buy a $300,000 house, you need a $60,000 down payment (20%). If you can only save $30,000, you would need to look at less expensive houses or accept PMI and a higher monthly payment.
A mortgage lender or housing counselor can walk you through this math. Many nonprofits offer free homebuyer counseling that includes down payment planning. Your city or county housing authority can refer you to one.
What happens to your down payment after you buy
Your down payment becomes equity in the house—the portion you own outright. As you pay your mortgage, you build more equity. After 30 years, you own the house completely.
Equity is valuable. You can borrow against it (a home equity loan or line of credit). If you sell the house, you keep the proceeds after paying off the loan. If the house increases in value, your equity increases too. Your down payment is the foundation of that ownership.
If you stop paying your mortgage, the lender can foreclose and take the house. You lose your down payment and your equity. This is why lenders care about down payment size—it shows you have skin in the game and are less likely to walk away.
Frequently Asked Questions
Can I buy a house with no money down?
Yes, if you may have access to for a VA loan (for military members and veterans) or a USDA loan (for rural properties). Both allow 0% down. Conventional and FHA loans require at least 3% to 3.5% down. If you do not may have access to for VA or USDA, you will need to save something.
What if I do not have 20% saved?
You can buy with less—3%, 5%, or 10% down—but you will pay PMI until you reach 20% equity. PMI adds $100 to $300+ per month depending on your loan size. Many first-time buyers use this route because waiting to save 20% means renting for years longer. Compare the cost of PMI against the cost of continued rent to see which makes sense for you.
Can I use my retirement account for a down payment?
Some retirement accounts allow withdrawals for first-time homebuyers. A traditional or Roth IRA lets you withdraw up to $10,000 lifetime for a first-time home purchase without the usual early withdrawal penalty. A 401(k) may allow a loan against your balance. Withdrawing from retirement accounts has tax consequences and reduces your retirement savings, so talk to a tax professional or financial advisor before doing this.
Do I have to use my own money for a down payment?
No. Gifts from family, down payment assistance programs, and employer benefits can cover part or all of it. The lender just needs to know the source of the money. Borrowed money (other than the mortgage itself) usually cannot be used—the lender wants to see that you have your own funds at risk.
What if I put down more than 20%?
You avoid PMI and get a lower interest rate, which saves money over time. You also build equity faster. The tradeoff is that you have less cash available for emergencies or other needs. There is no single right answer—it depends on your situation and comfort level.