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 comes from your own savings, not from borrowed money. The lender then finances the rest of the purchase price through a mortgage — a loan you repay over 15, 20, or 30 years.

Lenders require a down payment because it reduces their risk. If you stop paying the mortgage, the lender can foreclose and sell the house. A down payment means the house is worth more than what you owe, so the lender recovers their money even if the sale price drops. The larger your down payment, the less the lender risks, which is why larger down payments often come with better interest rates.

Down payments typically range from 3% to 20% of the home's purchase price, though some loans require more and some allow less. A $300,000 house with a 10% down payment means you pay $30,000 upfront and borrow $270,000.

Key Takeaways

  • Your down payment is your own money paid upfront; the rest of the purchase price comes from a mortgage loan you repay over time.
  • Down payment size affects your interest rate, monthly payment, and whether you must pay mortgage insurance — larger down payments usually mean better loan terms.
  • If you put down less than 20%, most lenders require you to pay private mortgage insurance (PMI), which protects the lender if you default.
  • Down payment money comes from your savings, gifts from family members, or sometimes first-time homebuyer programs, but not from borrowed sources.
  • You pay the down payment at closing, the final meeting where you sign loan documents and receive the keys.

How down payment size affects your loan and monthly payment

The percentage you put down directly changes how much you borrow and what you pay each month. On a $300,000 house at 7% interest over 30 years, a 5% down payment ($15,000) means borrowing $285,000 with a monthly payment around $1,895. A 20% down payment ($60,000) means borrowing $240,000 with a monthly payment around $1,596. The difference is roughly $300 per month — $3,600 per year.

A larger down payment also lowers your loan-to-value ratio (LTV), which is how much you owe compared to what the house is worth. Lenders see lower LTV as lower risk, so they offer better interest rates. The difference between a 5% down payment and a 20% down payment can be 0.5% to 1% in interest rate, which compounds over 30 years into tens of thousands of dollars.

However, putting down a very large percentage can mean tying up money you might need for repairs, emergencies, or other goals. A financial advisor or mortgage lender can help you decide what percentage makes sense for your situation.

Private mortgage insurance and when you pay it

Private mortgage insurance (PMI) is a monthly fee added to your mortgage payment when you put down less than 20%. It protects the lender, not you — if you stop paying, PMI covers part of the lender's loss. PMI typically costs 0.5% to 1.5% of the loan amount per year, paid in monthly installments.

On a $285,000 loan (5% down on a $300,000 house), PMI might add $120 to $360 per month. You pay PMI until your loan balance drops to 80% of the home's original value, which usually takes 8 to 12 years of regular payments. Some loans let you request PMI removal earlier if you've built enough equity or if the home's value has risen.

PMI is not the same as homeowners insurance, which covers damage to the house itself. You must carry homeowners insurance regardless of your down payment size.

Where down payment money comes from

Down payment funds must come from sources you own or that are given to you. Your own savings account, checking account, or money market account all count. Stocks, bonds, or retirement account withdrawals (subject to tax rules) also work.

Family members can gift you down payment money with no strings attached. The lender will ask for a gift letter stating the money is a gift, not a loan you must repay. Some first-time homebuyer programs offer down payment help through grants or forgivable loans, meaning you receive money that does not have to be repaid if you meet certain conditions.

Money you borrow from friends, family, or other lenders does not count as your down payment. Lenders see borrowed money as additional debt that affects your ability to repay the mortgage. Some programs have specific rules about what sources are allowed, so ask your lender before moving money around.

What happens to your down payment at closing

You bring or wire your down payment money to the closing meeting, the final step before you own the house. At closing, a title company or attorney handles the money and documents. Your down payment is held in an escrow account until all paperwork is signed and verified.

Once everything is complete, your down payment is applied to the purchase price. The seller receives the down payment plus the mortgage proceeds (the borrowed money). You receive the deed, which proves you own the house, and the keys.

Closing also includes other costs beyond the down payment: loan origination fees, appraisal fees, title insurance, property taxes, homeowners insurance, and sometimes points (upfront fees to lower your interest rate). These closing costs typically run 2% to 5% of the purchase price and are separate from your down payment.

Down payment requirements for different loan types

Conventional loans (not backed by the government) usually require 3% to 20% down, though some lenders go as low as 3% for borrowers with strong credit. FHA loans, backed by the Federal Housing Administration, allow down payments as low as 3.5% but require mortgage insurance for the life of the loan, even after you reach 20% equity. VA loans, for military members and veterans, often require no down payment at all. USDA loans, for rural homebuyers, also typically require no down payment.

Each loan type has different credit score requirements, income limits, and property rules. An FHA loan might work for a first-time buyer with limited savings, while a conventional loan might offer better long-term costs if you can save a larger down payment. A mortgage lender can explain which loan types you may be able to use based on your situation.

Common mistakes to avoid with down payments

Do not drain your savings completely to make a large down payment. You need reserves for closing costs, inspections, appraisals, and emergencies after you buy. Most lenders want to see that you have savings left after closing.

Do not borrow money to fund your down payment, even if a family member offers a loan. Lenders count borrowed money as debt that affects your debt-to-income ratio, which can lower the amount you can borrow or raise your interest rate. A gift is fine; a loan is not.

Do not move money between accounts right before explore for a mortgage without telling your lender. Lenders verify where down payment money comes from to prevent fraud. Unexplained deposits can delay your loan or raise questions you will have to answer with documentation.

Do not assume a larger down payment always makes sense. If interest rates are low and you have other financial goals, putting 10% down and investing the rest might serve you better than putting 20% down. A financial advisor can help you weigh the trade-offs.

Frequently Asked Questions

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

You can withdraw from a 401(k) or traditional IRA, but you will owe income tax on the amount and may face a 10% early withdrawal penalty if you are under 59½. Some plans allow loans instead of withdrawals, which you repay to yourself. Roth IRAs have different rules. A tax professional or financial advisor can explain the cost of each option for your specific situation.

What if I cannot save a 20% down payment?

Most homebuyers put down less than 20% and pay PMI until they reach 20% equity. FHA loans allow 3.5% down. Some first-time homebuyer programs offer down payment help through grants or forgivable loans. Ask your lender or a local housing counselor what programs exist in your area.

Do I get my down payment back if the sale falls through?

Your down payment is held in escrow and returned to you if the sale does not close, unless you back out without a valid reason. If the inspection reveals major problems and your contract allows you to withdraw, you get your money back. If you straightforward change your mind, you may lose the down payment depending on your contract terms.

Can I negotiate the down payment amount with the seller?

The down payment is between you and your lender, not the seller. However, you can negotiate the purchase price itself, which indirectly affects your down payment. If you negotiate the price down, your down payment amount goes down too.

What is the difference between a down payment and earnest money?

Earnest money is a smaller deposit (usually 1% to 3% of the purchase price) you pay when you make an offer to show you are serious. It is held in escrow and applied to your down payment at closing. Your full down payment is paid at closing and may be larger than the earnest money you already gave.