A down payment is money you give the lender upfront to reduce the amount you need to borrow
When you buy a home, you don't have to pay the full price all at once. Instead, you pay part of it yourself (the down payment) and borrow the rest from a lender as a mortgage. The down payment comes out of your own savings. The lender then lends you the remaining balance, and you repay that loan over time with interest.
Think of it this way: if a house costs $300,000 and you make a $60,000 down payment, the lender gives you $240,000. You owe that $240,000 back, plus interest, over the life of the loan — usually 15 or 30 years.
The size of your down payment affects how much you borrow, how much interest you pay over time, and what your monthly payment will be. A larger down payment means a smaller loan, lower monthly payments, and less total interest paid. A smaller down payment means the opposite — but it also means you need less cash upfront to buy.
Key Takeaways
- Your down payment is your own money that reduces the size of the loan you need to borrow from a lender.
- Down payments typically range from 3% to 20% of the home's purchase price, depending on the loan type and your financial situation.
- A larger down payment lowers your monthly mortgage payment and the total interest you pay over the life of the loan.
- If your down payment is less than 20%, most lenders require you to pay mortgage insurance, which protects the lender if you stop paying.
- You must have the down payment saved and ready before you make an offer on a home.
Why lenders ask for a down payment
A down payment protects the lender's money. If you borrow $240,000 to buy a $300,000 house and then stop paying your mortgage, the lender takes back the house and sells it. If the house sells for less than $240,000, the lender loses money. Your $60,000 down payment is a cushion — it means the house can drop in value by $60,000 and the lender still gets their money back.
The down payment also shows the lender that you are serious about the purchase and that you have saved money responsibly. Someone who has saved $60,000 is statistically more likely to keep paying a mortgage than someone who has saved nothing.
Common down payment amounts and what they mean for your loan
Down payments are usually described as a percentage of the home's price. A 20% down payment is the traditional benchmark — it is large enough that most lenders do not require you to pay mortgage insurance. Below 20%, mortgage insurance becomes part of your monthly payment.
Here is how different down payment sizes affect a $300,000 home purchase:
| Down Payment % | Down Payment $ | Loan Amount | Mortgage Insurance Required? |
|---|---|---|---|
| 3% | $9,000 | $291,000 | Yes |
| 5% | $15,000 | $285,000 | Yes |
| 10% | $30,000 | $270,000 | Yes |
| 15% | $45,000 | $255,000 | Yes |
| 20% | $60,000 | $240,000 | No |
The loan amount is what you actually owe the lender. Your monthly mortgage payment is based on this number, plus interest. A smaller loan means a smaller monthly payment — but you need more cash upfront.
What happens if your down payment is less than 20%
Mortgage insurance is a monthly fee added to your mortgage payment when your down payment is below 20%. It protects the lender, not you. If you stop paying your mortgage, the insurance company pays the lender the difference between what they recover from selling the house and what you still owe.
Mortgage insurance costs vary, but it typically ranges from 0.5% to 1.5% of your loan amount per year, paid monthly. On a $285,000 loan, that could be $120 to $360 per month. You can remove mortgage insurance once you have paid down the loan enough that your remaining balance is 80% of the home's original value — but this takes years.
Some loan programs, like FHA loans, require mortgage insurance even at 20% down. Others, like VA loans for military members, do not require a down payment at all. The type of loan you choose affects both the down payment requirement and whether insurance is mandatory.
Where the down payment money comes from
Your down payment must come from your own savings or from a gift. You cannot borrow it from another lender — the money has to be yours. Lenders verify this by asking for bank statements showing the money has been in your account for at least two months, sometimes longer.
If a family member gives you money for your down payment, you will need a signed gift letter stating that the money is a gift, not a loan you have to repay. The lender needs to know you will not owe this money back, because that would be another debt affecting your ability to pay the mortgage.
Some first-time homebuyers use savings from a retirement account like a 401(k) or IRA, though this has tax consequences. Others save gradually over months or years. A few states and nonprofits offer down payment information programs, though these are less common than they once were and often have income limits.
How the down payment affects your total cost
A larger down payment saves you money in two ways: lower monthly payments and less interest paid over the life of the loan.
On a $300,000 home with a 30-year mortgage at 7% interest, here is the difference:
| Down Payment | Loan Amount | Monthly Payment (no insurance) | Total Interest Paid |
|---|---|---|---|
| 5% ($15,000) | $285,000 | ~$1,897 + insurance | ~$398,000 |
| 20% ($60,000) | $240,000 | ~$1,597 | ~$325,000 |
The 20% down payment saves about $300 per month and $73,000 in total interest. However, it also requires $45,000 more upfront. The choice depends on whether you have that cash available and whether you would rather use it for other purposes, like an emergency fund or retirement savings.
Down payment timing and what happens next
You do not hand over your down payment when you make an offer on a home. Instead, you put down an earnest money deposit — usually 1% to 3% of the purchase price — to show you are serious. This money is held by a third party (often a title company) and applied to your down payment at closing.
The full down payment is due at closing, which is when you sign all the paperwork and officially own the home. At closing, your down payment, the lender's money, and various fees are all exchanged. You receive the keys and the deed to the property.
Between making an offer and closing, you will have a home inspection, an appraisal, and final approval from the lender. The lender wants to make sure the house is worth what you are paying for it — if it is not, they may lower the loan amount, which means you would need to increase your down payment or walk away from the deal.
Frequently Asked Questions
Can I buy a house with less than 3% down?
Some loan programs allow down payments as low as 0% — VA loans for military members and USDA loans for rural properties are examples. Conventional loans typically require at least 3%. FHA loans require 3.5% down. The lower the down payment, the higher the mortgage insurance cost.
What if I don't have enough saved for a 20% down payment?
You can buy with a smaller down payment and pay mortgage insurance. Many people do this. You can also wait and save more, buy a less expensive home, or look into first-time homebuyer programs in your state or county. There is no single right answer — it depends on your timeline and financial situation.
Can I use a gift from family for my down payment?
Yes, but the lender needs a signed letter from the person giving you the money stating it is a gift, not a loan. The lender will verify the gift money is actually in your bank account. Some loan programs limit how much of your down payment can be a gift.
What if the house appraises for less than the purchase price?
If the appraisal comes in low, the lender will only lend based on the lower value. You can renegotiate the price with the seller, increase your down payment to make up the difference, or walk away. This is why the appraisal matters — it protects both you and the lender.
Do I get my earnest money back if the deal falls through?
It depends on why the deal falls through. If the inspection or appraisal reveals a problem and you back out for that reason, you usually get it back. If you back out for no reason, you may lose it. Read your purchase agreement carefully — it spells out when earnest money is refunded.