What a down payment is and why lenders require it

A down payment is money you give to the seller or lender upfront when you buy a house. It reduces the amount you need to borrow. If a house costs $300,000 and you put down $60,000, you borrow $240,000 through a mortgage.

Lenders require down payments because they reduce the lender's risk. If you stop paying your mortgage, the lender can sell the house. A larger down payment means the house is more likely to sell for enough to cover what you still owe. Without a down payment, the lender has no cushion if the house value drops or you default.

Down payments also signal to the lender that you have saved money and can manage finances. Someone who has saved $60,000 looks less risky than someone who has saved nothing.

Key Takeaways

  • Down payments typically range from 3% to 20% of the home price, though the exact amount depends on the loan type and your credit history.
  • A smaller down payment means a larger monthly mortgage payment and the requirement to pay private mortgage insurance (PMI) until you reach 20% equity.
  • Your down payment money comes from your own savings and does not get borrowed—it is separate from the mortgage loan.
  • The down payment is due at closing, the final step when you sign all documents and receive the keys to the house.
  • Some loan programs allow down payments as low as 3%, while others require 10% to 20%, depending on the lender and your financial profile.

How much down payment you need

Down payment requirements vary by loan type. Conventional loans (not backed by the federal government) often require 5% to 20% down. A Federal Housing Administration (FHA) loan allows as little as 3.5% down. A Veterans Affairs (VA) loan for military members may require 0% down. A USDA loan for rural properties may also require 0% down.

Your credit score and income also affect how much you must put down. If your credit score is lower or your debt-to-income ratio is high, lenders may require a larger down payment to offset the risk. A lender might accept 3% down from someone with a 750 credit score but require 10% from someone with a 620 score.

The down payment amount is negotiable in some cases. If you have strong finances and the seller is motivated, you may be able to put down less than the lender's standard requirement. However, you cannot put down less than the lender's minimum, and doing so usually triggers additional costs.

What happens when your down payment is less than 20%

If you put down less than 20%, you will pay private mortgage insurance (PMI). PMI is an insurance policy that protects the lender if you stop paying your mortgage. The cost is added to your monthly mortgage payment and typically ranges from 0.5% to 1% of the loan amount per year, though the exact rate depends on your down payment size, credit score, and loan type.

PMI is not optional—it is required by law when you borrow more than 80% of the home's value. On a $300,000 house with a $60,000 down payment (20%), you would not pay PMI. On the same house with a $30,000 down payment (10%), you would pay PMI until you reach 20% equity.

You can stop paying PMI once you reach 20% equity in the home. Equity builds as you pay down the mortgage and as the home's value increases. You can request PMI removal once you hit 20%, though some loans require you to wait a certain amount of time or reach a specific loan-to-value ratio first.

When and how you pay the down payment

You do not pay the full down payment all at once. Early in the buying process, you submit an earnest money deposit, usually 1% to 3% of the purchase price. This shows the seller you are serious about buying. The earnest money is held in escrow (a neutral third-party account) and applied to your down payment at closing.

The rest of the down payment is due at closing, the final meeting where you sign all mortgage documents and receive the keys. Closing typically happens 30 to 45 days after you make an offer. At closing, you bring a cashier's check or wire transfer for the remaining down payment balance. The title company or escrow agent confirms you have paid the full amount before releasing the funds to the seller.

You cannot borrow the down payment from another source. Lenders verify that your down payment comes from your own savings, not from a loan. Some lenders allow gifts from family members, but you must document the gift in writing and confirm it does not need to be repaid.

How your down payment affects your monthly payment

A larger down payment directly lowers your monthly mortgage payment. On a $300,000 house at 7% interest over 30 years, a $60,000 down payment (20%) results in a monthly payment of roughly $1,595 (before taxes and insurance). A $30,000 down payment (10%) results in a monthly payment of roughly $1,912 (before taxes and insurance), plus PMI of around $105 to $160 per month.

The difference compounds over time. Over 30 years, a 20% down payment saves you tens of thousands of dollars in interest and PMI compared to a 10% down payment. However, a smaller down payment lets you buy sooner if you do not have $60,000 saved yet.

Your total housing cost also includes property taxes, homeowners insurance, and HOA fees if applicable. These are not affected by your down payment size, but they are included in your monthly budget.

Down payment assistance programs

Some employers, nonprofits, and state or local governments offer down payment assistance. These programs may provide grants (money you do not repay) or forgivable loans (loans that disappear if you stay in the home for a set period). Requirements vary widely—some programs are limited to first-time buyers, some to specific income levels, and some to certain neighborhoods or property types.

Your mortgage lender can tell you which programs you may be able to use. Some lenders have partnerships with assistance programs and can streamline the process. You can also search your city or county government website for "down payment assistance" to find local programs.

Down payment assistance does not change how the mortgage works—it simply reduces how much of your own money you need to contribute upfront. The lender still requires the same down payment percentage; the assistance program just covers part of it.

Common mistakes when saving for a down payment

Do not move large sums of money shortly before applying for a mortgage. Lenders ask for bank statements and want to see where money came from. Unexplained deposits can delay your loan approval. If you receive a gift, get written confirmation from the gift-giver stating it is a gift and does not need to be repaid.

Do not open new credit accounts or make large purchases while your mortgage application is pending. Lenders pull your credit report again before closing, and new debt or inquiries can affect your approval. Wait until after closing to buy furniture or a car.

Do not assume you need 20% down. Many buyers put down 5% to 10% and pay PMI—it is a valid path if it lets you buy sooner. Calculate whether paying PMI for a few years costs less than waiting to save another $30,000.

Frequently Asked Questions

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

Yes, but with limits and penalties. You can withdraw from a traditional IRA without penalty if you are a first-time homebuyer (defined as not owning a home in the past two years), up to $10,000 lifetime. A 401(k) withdrawal is more complex and may trigger taxes and penalties. Consult a tax professional before withdrawing, as the rules vary by account type and your age.

What if I do not have enough for the down payment the lender requires?

Look for loan programs with lower down payment requirements, such as FHA loans (3.5%) or USDA loans (0%). Ask your lender about down payment assistance programs in your area. You can also negotiate with the seller to cover part of your closing costs, which frees up more of your savings for the down payment.

Does the down payment get refunded if the sale falls through?

The earnest money deposit is refunded if the sale fails due to a contingency you included in your offer, such as a failed home inspection or appraisal. If you back out without a valid reason, you typically lose the earnest money. Read your purchase agreement carefully to understand which scenarios protect your deposit.

Can I put down more than 20% to avoid PMI?

Yes. Putting down 25%, 30%, or more eliminates PMI immediately and lowers your monthly payment further. However, you lose liquidity—that money is tied up in the house. Consider whether keeping some cash in savings for emergencies is worth paying PMI for a few years.

How does the down payment affect my taxes?

The down payment itself does not affect your taxes. However, once you own the home, you may deduct mortgage interest and property taxes on your federal tax return if you itemize deductions. The down payment reduces the amount you borrow, which means less interest to deduct over time.