A down payment is the cash you put toward a house at closing, with the rest financed through a mortgage loan
The down payment is your initial investment in the property. If you buy a house for $300,000 and put down $60,000, your lender finances the remaining $240,000. The percentage you put down—in this example, 20%—affects your interest rate, monthly payment, and whether you'll pay mortgage insurance.
First-time buyers often assume they need 20% down. That's not true. Many programs let you put down 3% to 5%, and some allow even less. The trade-off is that a smaller down payment means a larger loan, higher monthly payments, and mortgage insurance costs added to your bill each month until you've paid down enough of the principal.
The down payment comes from your own savings. You cannot borrow it from another person or take it as a loan—lenders verify the source of funds and reject borrowed money. Some programs do allow gifts from family members, but the gift must be documented and the giver cannot expect repayment.
Key Takeaways
- Down payments for first-time buyers range from 3% to 20% depending on the loan program, not a fixed requirement.
- Putting down less than 20% means you'll pay mortgage insurance (PMI) as part of your monthly payment until you reach 20% equity.
- Your down payment must come from your own savings; borrowed money disqualifies most loans, though family gifts are often permitted if documented.
- FHA loans, VA loans, and USDA loans each have different down payment minimums and rules about where the money can come from.
- The size of your down payment directly affects your interest rate—larger down payments usually mean lower rates.
How down payment size affects your monthly costs
A larger down payment lowers three things: your loan amount, your interest rate, and whether you pay mortgage insurance. On a $300,000 house, the difference between 3% down and 20% down is roughly $51,000 in cash upfront—but it also changes what you owe each month.
With 3% down ($9,000), you borrow $291,000. With 20% down ($60,000), you borrow $240,000. That $51,000 difference in principal means lower monthly payments on the 20% scenario. But there's also mortgage insurance. On a conventional loan with 3% down, you'll pay PMI—typically 0.5% to 1.5% of the loan amount annually, added to your monthly bill. This insurance protects the lender if you default, not you. It stays on your bill until you've paid the loan down to 80% of the home's value.
Lenders also offer better interest rates to borrowers with larger down payments, because the risk to the lender is lower. The difference might be 0.25% to 0.5% on your rate, which compounds over 30 years. Run the numbers with a mortgage calculator using your actual down payment amount and credit score to see the real monthly difference.
Down payment requirements by loan type
| Loan Type | Minimum Down Payment | Who Offers It | Key Requirement |
|---|---|---|---|
| Conventional | 3% to 20% | Banks, credit unions, mortgage lenders | Credit score typically 620+; down payment must be your own funds |
| FHA | 3.5% | FHA-approved lenders | Credit score 580+; mortgage insurance required for life of loan if down payment under 10% |
| VA | 0% | VA-approved lenders | Active duty, veteran, or surviving spouse status; no down payment, no mortgage insurance |
| USDA | 0% | USDA-approved lenders | Income limits and rural property location; no down payment, mortgage insurance required |
Conventional loans are the most common and flexible. You can put down anywhere from 3% to 20% (or more), and mortgage insurance drops off once you reach 20% equity. Your credit score and debt-to-income ratio matter more with conventional loans than with government-backed programs.
FHA loans are designed for first-time buyers and those with lower credit scores. The 3.5% minimum is the lowest among programs that require a down payment. However, FHA mortgage insurance is permanent if you put down less than 10%—it never goes away, even after you've paid off half the loan. If you put down 10% or more on an FHA loan, the insurance drops after 11 years.
VA and USDA loans require zero down payment. VA loans are for military members, veterans, and surviving spouses—no mortgage insurance is charged. USDA loans are for rural properties and have income limits, but also charge no down payment. Both are powerful tools if you meet the criteria, because you avoid the down payment hurdle entirely.
Where down payment money comes from and what lenders verify
Lenders require documentation of your down payment source. They'll ask for bank statements, investment account statements, or proof of a gift. The goal is to confirm the money is yours, not borrowed, and that you haven't taken on new debt to fund the purchase.
Your own savings—checking accounts, savings accounts, money market accounts, stocks, bonds, retirement accounts (with some restrictions)—all count. If you're using retirement funds, rules vary by account type. Traditional IRAs and 401(k)s have withdrawal penalties unless you may have access to for an exception like the first-time homebuyer rule (which allows up to $10,000 lifetime from a traditional IRA without the early withdrawal penalty, though income tax still applies). Roth IRAs have more flexibility for first-time buyers.
Family gifts are allowed on most loans, but the giver cannot expect repayment. The lender will require a signed gift letter stating the money is a gift, not a loan. Some programs (like VA loans) allow larger gift amounts; others cap gifts at a percentage of the purchase price. Ask your lender about their specific gift policy before accepting money from family.
Down payment information programs exist in many states and counties. These are grants or forgivable loans that reduce the amount you need to save. They vary widely by location and income level. Your local housing authority or a nonprofit housing counselor can tell you what's available in your area. These programs do not require repayment (if they're grants) or require repayment only if you sell the home within a set period (if they're forgivable loans).
Closing costs are separate from your down payment
Many first-time buyers confuse down payment with closing costs. They're different. Your down payment is the equity you're putting into the house. Closing costs are fees paid to the lender, title company, appraiser, and other parties involved in the transaction—typically 2% to 5% of the purchase price.
On a $300,000 house, closing costs might run $6,000 to $15,000. This is separate from your down payment. If you're putting 5% down ($15,000) on that house, you also need to budget for closing costs. Some lenders allow you to roll closing costs into the loan, which means you don't pay them upfront but you pay interest on them over 30 years. Others require you to pay them at closing. Ask your lender which costs can be rolled in and which must be paid in cash.
How to save for a down payment as a first-time buyer
Start by calculating what you actually need. If you're looking at homes in the $250,000 to $350,000 range and planning to put 5% down, you need $12,500 to $17,500 plus closing costs. That's a concrete target, not a vague goal.
Open a separate savings account for the down payment and set up automatic transfers from each paycheck. Even $200 or $300 per month adds up. If you have a tax refund, bonus, or inheritance, direct it to this account. Track the balance monthly so you can see progress.
Consider whether a down payment information program in your area could reduce the amount you need to save. Many programs target first-time buyers with moderate incomes and can provide $5,000 to $25,000 in grants or forgivable loans. Your local housing authority, nonprofit housing counselor, or the National Foundation for Credit Counseling can point you toward programs in your state.
If you're nowhere near a 3% down payment, renting longer while you save is often smarter than stretching into a loan you can't afford. A mortgage payment that's too high leaves no room for repairs, property taxes, insurance, or life emergencies. The down payment is just the beginning of homeownership costs.
Frequently Asked Questions
Can I use a 401(k) loan to fund my down payment?
Yes, but it's risky. A 401(k) loan is borrowed from your own retirement account and must be repaid with interest. If you leave your job, the loan is typically due within 60 days or it's treated as a withdrawal with penalties and taxes. Most lenders will count the loan repayment as debt on your process, which reduces how much you can borrow for the mortgage. Talk to your plan administrator and mortgage lender before taking this route.
What happens if I don't have 20% down?
You'll pay mortgage insurance (PMI on conventional loans, or built-in insurance on FHA, VA, or USDA loans). PMI typically costs 0.5% to 1.5% of your loan amount annually and is added to your monthly payment. On a conventional loan, PMI drops once you reach 20% equity. On an FHA loan with less than 10% down, it's permanent. The trade-off is that you can buy sooner with a smaller down payment, but your monthly costs are higher.
Can I borrow my down payment from a friend or family member?
Not as a loan. Lenders reject borrowed money because it increases your debt and risk. However, a gift from a family member is usually allowed if you provide a signed gift letter stating no repayment is expected. Some programs cap the gift amount or require the giver to have a relationship to you. Ask your lender about their gift policy before accepting money.
Do I need to show proof of where my down payment came from?
Yes. Lenders require bank statements, investment statements, or other documentation showing the money is yours and has been in your account for a set period (usually 60 days). This is called "seasoning" and prevents fraud. If you receive a gift, you'll need the gift letter and proof the money came from the giver's account to yours.
What if I'm a veteran—do I have to put money down?
No. VA loans require zero down payment and no mortgage insurance. If you're may be able to access (active duty, veteran, or surviving spouse), a VA loan is one of the strongest tools available because you avoid the down payment hurdle entirely. You'll still pay a VA funding fee (typically 1.5% to 3.6% of the loan amount), which can be rolled into the loan, but there's no down payment required.