A down payment reduces the lender's risk by proving you have skin in the game

A down payment is money you put toward a purchase upfront, before you borrow the rest. The lender uses it to lower the amount they have to lend you. If you buy a house for $300,000 and put down $60,000, the lender finances $240,000. That $60,000 cushion protects the lender if you stop paying and they have to sell the property—they recover their money faster because you already paid part of the price.

From the lender's perspective, a down payment signals that you are serious about the purchase and have the discipline to save. It also means you have more to lose if you default. Someone who puts down 20 percent is statistically less likely to walk away than someone who puts down 3 percent, because they have more equity at stake.

The size of your down payment directly affects the terms you get offered. A larger down payment usually means a lower interest rate, lower monthly payments, and sometimes no requirement to pay private mortgage insurance (PMI)—an extra monthly fee that protects the lender when you borrow more than 80 percent of the home's value.

Key Takeaways

  • A down payment reduces what the lender has to finance, which lowers their risk if you default and the property must be sold.
  • Lenders view a larger down payment as a sign of financial stability and commitment, which often results in better interest rates and terms.
  • Down payments below 20 percent typically trigger private mortgage insurance, adding to your monthly cost until you build enough equity.
  • The down payment amount you can afford depends on your savings, income, and the lender's minimum requirements, which vary by loan type.

How down payment size affects your loan terms

Lenders use your down payment percentage to calculate risk. A 20 percent down payment on a $300,000 home ($60,000) is considered low-risk by most lenders. A 5 percent down payment ($15,000) is higher-risk because the lender is financing 95 percent of the purchase price. If the home value drops or you default, the lender may not recover the full loan amount by selling the property.

This risk difference shows up in your interest rate. A borrower with a 20 percent down payment might be offered a 6.5 percent rate, while a borrower with 5 percent down might be offered 7.2 percent on the same loan. Over a 30-year mortgage, that difference costs tens of thousands of dollars in extra interest.

Down payment size also determines whether you pay PMI. If you put down less than 20 percent, the lender requires you to carry mortgage insurance. This insurance protects the lender, not you, and costs between 0.5 and 1.5 percent of your loan amount per year, added to your monthly payment. Once your equity reaches 20 percent (through a combination of down payment and principal paid over time), you can request to have PMI removed.

What happens if you cannot save a large down payment

Many loan programs exist for buyers who cannot put down 20 percent. FHA loans (backed by the Federal Housing Administration) allow down payments as low as 3.5 percent. VA loans (for military members and veterans) often require zero down payment. USDA loans (for rural properties) also allow zero down for borrowers who meet income limits. Conventional loans typically require a minimum of 3 to 5 percent down.

The trade-off is that lower down payments mean higher monthly payments, higher interest rates, and PMI costs. A smaller down payment also means you build equity more slowly—the first years of your mortgage go mostly toward interest rather than ownership. However, if you cannot save $60,000 but can save $15,000, a 5 percent down payment loan may still be the right choice, especially if home prices are rising in your area and waiting to save more would cost you more in the long run.

Some programs offer down payment information through nonprofits, state housing agencies, or employer programs. These are separate from the loan itself and can reduce or eliminate the amount you need to save. Your lender or a housing counselor can point you toward programs in your area.

Down payment versus closing costs

A down payment is not the same as closing costs. The down payment is the portion of the purchase price you pay upfront. Closing costs are fees for the loan itself—appraisal, title search, underwriting, attorney fees, and other services. Closing costs typically run 2 to 5 percent of the loan amount and are separate from your down payment.

If you are buying a $300,000 home with a 5 percent down payment, you need $15,000 for the down payment plus another $6,000 to $15,000 for closing costs. Some loan programs allow you to roll closing costs into the loan, but this increases the amount you borrow and the total interest you pay. Others allow the seller to cover part or all of the closing costs as part of the negotiation.

Why lenders care about your down payment more than you might think

A down payment is the first thing a lender looks at because it reveals your financial behavior. If you have saved 20 percent of a home's purchase price, you have demonstrated the ability to delay spending, manage debt, and plan for a major purchase. If you are borrowing 95 percent of the purchase price, the lender has to trust that your income alone will carry you through 30 years of payments, which is a much bigger bet.

Down payments also affect what happens after you buy. If you put down 20 percent and the home value drops 10 percent, you still have positive equity and can sell or refinance without losing money. If you put down 3 percent and the value drops 10 percent, you are underwater—you owe more than the home is worth. This situation makes it harder to sell, refinance, or move if your circumstances change.

How to decide what down payment makes sense for you

The "right" down payment depends on three things: how much you have saved, what interest rate you can get at different down payment levels, and how long you plan to stay in the home. If you have $100,000 saved and are buying a $300,000 home, putting down 33 percent is possible, but it might not be optimal if you need to keep cash for emergencies or other goals.

A common strategy is to put down enough to avoid PMI (20 percent) if you can do so without depleting your emergency fund. If you cannot, putting down 5 to 10 percent and accepting PMI for a few years is often better than waiting years to save more. PMI is temporary; it goes away once you have paid down the loan enough. A low down payment that lets you buy now, build equity, and lock in a home price may be worth more than waiting.

Talk to a lender about the actual numbers for your situation. They can show you the difference in monthly payment, total interest, and PMI costs between a 5 percent and 20 percent down payment on the specific home and loan amount you are considering.

Frequently Asked Questions

Can I use a gift from family as my down payment?

Yes, most lenders allow down payment gifts from family members. You will need a signed gift letter stating the money is a gift, not a loan, and that the family member does not expect repayment. The lender will verify the gift funds are in your account before closing. Some loan programs have limits on how much of your down payment can be a gift.

What if I put down less than 20 percent—will I ever get rid of PMI?

Yes. Once your loan balance drops to 80 percent of the home's original purchase price (through regular payments), you can request PMI removal. You may also be able to remove it sooner if the home has increased in value and you get a new appraisal. Some loans remove PMI automatically once you reach 78 percent loan-to-value, but you have to ask for it on others.

Is a larger down payment always better?

Not always. A larger down payment lowers your monthly payment and interest rate, but it also ties up cash you might need for emergencies, home repairs, or other goals. If you can get a reasonable interest rate with 10 percent down and keeping $30,000 in savings gives you peace of mind, that may be the better choice than putting down 20 percent and having almost nothing left.

Do I have to put down 20 percent to get a good interest rate?

No. You can get competitive rates with 10 or even 5 percent down, though they will be slightly higher than 20 percent down rates. The difference in rate depends on the lender, the loan program, and current market conditions. Shopping with multiple lenders shows you the actual rates available at different down payment levels.