Where the money comes from

A down payment comes from your own savings, a loan from someone else, a gift, or a combination of those three. Most people use savings they have built up over months or years, sometimes paired with a gift from a family member. Some borrow against retirement accounts or take out a personal loan. The lender—the bank or mortgage company—will ask you to prove where the money came from, because they want to know you did not borrow it from someone else without telling them.

The amount you need depends on the purchase price and the type of mortgage. Conventional mortgages typically require 3 to 20 percent down, though the exact percentage varies by lender. Federal Housing Administration (FHA) mortgages allow as little as 3.5 percent down. Veterans Affairs (VA) mortgages and United States Department of Agriculture (USDA) mortgages sometimes require zero down. A $300,000 house with a 5 percent down payment means you need $15,000 upfront.

The lower your down payment, the higher your monthly mortgage payment will be, because you are borrowing more. You will also pay private mortgage insurance (PMI) if you put down less than 20 percent on a conventional loan. PMI protects the lender if you stop paying; it costs between 0.5 and 1.5 percent of the loan amount per year, added to your monthly payment. That cost disappears once you have paid down the loan to 80 percent of the home's value.

Key Takeaways

  • Saving for a down payment takes time; most people accumulate it over one to three years by setting aside money each month into a separate account.
  • A gift from a family member can count toward your down payment, but the lender will require a signed letter stating it is a gift, not a loan you must repay.
  • Borrowing from a retirement account like a 401(k) or traditional IRA is possible but triggers taxes and penalties unless you may have access to for an exception.
  • The lower your down payment, the more you pay in interest and mortgage insurance over the life of the loan, so saving more upfront saves money later.
  • First-time homebuyer programs in your state or county may offer down payment grants or matching funds that do not require repayment.

Building savings month by month

The most straightforward path is to save money in a separate account each month until you reach your target. Open a high-yield savings account at a bank or credit union—these currently pay between 4 and 5 percent annual interest, which means your money grows while you wait. Do not keep down payment savings in a checking account; the interest is negligible and the ease of access makes it too tempting to spend.

Calculate how much you need and divide by the number of months you are willing to wait. If you need $20,000 and want to buy in two years, you need to save roughly $833 per month. If that feels impossible, extend your timeline to three years and the monthly amount drops to $555. The longer you save, the less painful each month's contribution becomes, and the more interest you earn.

Automate the transfer. Set up a recurring transfer from your checking account to your savings account on the day you get paid. You will not miss money you never see in your checking account, and the discipline compounds. Even $300 per month becomes $3,600 in a year and $10,800 in three years.

Gifts from family members

Money given to you by a parent, grandparent, sibling, or other relative can count toward your down payment. The lender will require a gift letter—a signed document from the person giving you the money that states the amount, confirms it is a gift (not a loan), and says they do not expect repayment. Without this letter, the lender will treat the money as a debt you owe, which increases your debt-to-income ratio and may disqualify you for the mortgage.

The gift letter must come from the person giving the money, not from you. Your lender will provide a template or specific language they require. The giver should keep a copy and you should keep a copy. Some lenders also ask for a bank statement showing the money moved from the giver's account to yours, to prove the gift actually occurred.

There is no federal limit on the size of a gift for a down payment. The giver may owe federal gift tax if the amount exceeds $18,000 in a single year (as of 2024; this threshold changes annually), but that is their tax responsibility, not yours. Confirm with the giver that they understand the tax implications before accepting a very large gift.

Borrowing from retirement accounts

A 401(k) or similar workplace retirement plan may allow you to borrow against your own balance. The rules vary by plan, but typically you can borrow up to 50 percent of your vested balance, up to $50,000. You repay the loan to yourself over five years (or longer if the money is for a first-time home purchase, depending on the plan). The interest rate is usually the prime rate plus 1 percent, which is lower than a personal loan.

The catch: if you leave your job, you typically must repay the loan within 60 days or it becomes a withdrawal. A withdrawal before age 59½ triggers a 10 percent early withdrawal penalty plus income tax on the amount withdrawn. For a first-time homebuyer, the IRS allows a one-time exception to the 10 percent penalty on up to $10,000 withdrawn from a traditional IRA, but you still owe income tax on that amount.

Borrowing from retirement savings also means that money stops growing for retirement. If you borrow $30,000 at age 35 and do not repay it for five years, that $30,000 loses 30 years of compound growth. Run the numbers with a financial advisor before taking this step; the long-term cost to retirement may outweigh the benefit of buying a house sooner.

First-time homebuyer programs and grants

Many states, counties, and cities offer down payment assistance to first-time homebuyers. These programs vary widely: some provide grants (money you do not repay), some offer low-interest loans, and some match your savings dollar-for-dollar up to a certain amount. A few states have programs that forgive part of the loan if you stay in the home for a set number of years.

To find programs in your area, start with your state housing finance agency. Search "[your state] housing finance agency" or "[your state] down payment assistance." Your county assessor's office or local housing authority can also point you toward active programs. Some nonprofits and community development organizations administer these funds locally, so calling your city's housing department is often faster than searching online.

Most programs require you to complete a homebuyer education course, which teaches you how mortgages work, what to expect during closing, and how to maintain a home. These courses are often free or low-cost and take one to two days. The course itself is valuable; it also makes you a stronger candidate for assistance programs.

Personal loans and lines of credit

A personal loan from a bank or credit union is unsecured debt—the lender does not hold collateral. Interest rates typically range from 6 to 36 percent depending on your credit score and the lender. A $20,000 personal loan at 12 percent interest over five years costs roughly $4,400 in interest alone. You will also owe a monthly payment on top of your future mortgage payment, which affects how much house you can afford.

A home equity line of credit (HELOC) is only an option if you already own a home and have built equity in it. You borrow against that equity at a lower interest rate than a personal loan, typically 7 to 10 percent. The downside: if you cannot repay, the lender can foreclose on your home.

Both options are expensive compared to saving or accepting a gift. Use them only if you have a specific reason to buy now rather than wait—for example, you found the right house and interest rates are about to rise, or you are relocating for a job with a firm start date. Borrowing to cover a down payment means you are paying interest on top of the mortgage interest, which compounds the total cost of homeownership.

Reducing the down payment you need

If saving feels out of reach, explore mortgage programs that require less money down. An FHA loan requires only 3.5 percent down instead of the 5 to 10 percent many conventional loans demand. A VA loan (if you are a veteran or active-duty service member) or a USDA loan (if you are buying in a rural area and meet income limits) may require zero down. These programs exist specifically because they recognize that saving a large down payment is not realistic for many buyers.

The trade-off is that a smaller down payment means higher monthly payments and mortgage insurance costs. Run the numbers: a $300,000 house with 3.5 percent down (FHA) versus 10 percent down (conventional) will have a lower monthly payment with the conventional loan, but only if you can actually save that extra $19,500. If you cannot, the FHA loan is the realistic option, not a failure to plan.

Some lenders offer down payment assistance as part of their mortgage product. Ask your lender whether they have a program that covers part of the down payment in exchange for a slightly higher interest rate or a longer loan term. These are less common than they used to be, but they exist.

Frequently Asked Questions

Can I use a credit card to pay for a down payment?

Most lenders prohibit this. They will ask where the down payment money came from, and if they discover you charged it to a credit card, they may deny the mortgage. Even if they allow it, you would owe credit card interest (typically 18 to 25 percent) on top of mortgage interest, which is extremely expensive. Avoid this unless you have no other option and can pay off the card immediately.

What if I do not have any savings and no family can gift money?

Look for first-time homebuyer programs in your area; many exist specifically for people in this situation. An FHA loan with 3.5 percent down is also an option if you can borrow that smaller amount. Some nonprofits offer down payment assistance or matched savings programs where they contribute money if you save a certain amount. Your local housing authority can direct you to these programs.

Does the down payment have to come from my bank account?

It has to come from a source you can document. A bank account is easiest because the lender can see the money moved. A gift must be documented with a gift letter. Money from selling something (a car, jewelry, investments) can work if you have proof of the sale. The lender wants a paper trail showing the money is yours and was not borrowed from someone else without their knowledge.

Will saving for a down payment hurt my credit score?

Saving money itself does not affect your credit score. Opening a new savings account may trigger a soft inquiry, which does not lower your score. The only way saving hurts your credit is if you open new credit cards or take out loans to fund the down payment, which increases your debt and lowers your score. Keep your credit activity stable while you save.

How much should I save before I start house hunting?

Have at least your full down payment saved before you make an offer. You will also need money for closing costs (typically 2 to 5 percent of the purchase price), a home inspection, and an appraisal. Aim to have 10 to 15 percent of the purchase price saved total—down payment plus closing costs. If you do not have this, explore first-time homebuyer programs or lower-down-payment mortgages before you start looking.