A down payment is the money you give the seller at closing, taken from your own pocket rather than borrowed
When you buy a house, the down payment is the portion of the purchase price you pay in cash on the day you close. The rest comes from a mortgage loan. If a house costs $300,000 and you make a $60,000 down payment, you borrow $240,000. The down payment is yours to lose—if the deal falls through because of you, the seller keeps it. If the lender backs out, you get it back.
Down payments exist because lenders want to see that you have skin in the game. A larger down payment means you are borrowing less, which is less risk for the bank. It also means you start with equity in the house from day one instead of owing more than the property is worth.
The size of your down payment affects your monthly payment, the interest rate you are offered, and whether you have to pay mortgage insurance. These are real costs that compound over the life of the loan, so the down payment decision shapes your finances for 15 or 30 years.
Key Takeaways
- A down payment is cash you provide at closing; the lender finances the rest through a mortgage.
- Larger down payments lower your monthly payment, often reduce your interest rate, and eliminate the need for mortgage insurance.
- Down payment amounts vary by loan type: conventional loans often require 3 to 20 percent, while FHA loans may accept 3.5 percent and VA loans may require zero.
- If you put down less than 20 percent on a conventional loan, you will pay private mortgage insurance (PMI) until you reach 20 percent equity.
- Down payment funds must come from your own savings; most lenders require proof that the money is yours and has been in your account for at least two months.
How down payment size changes what you owe each month
A larger down payment shrinks the loan amount, which shrinks your monthly payment. On a $300,000 house at 7 percent interest over 30 years, a $60,000 down payment (20 percent) results in a monthly payment around $1,680. A $30,000 down payment (10 percent) results in a monthly payment around $1,890—that is $210 more per month, or $75,600 more over the life of the loan.
The difference grows if you factor in mortgage insurance. When you put down less than 20 percent on a conventional loan, the lender requires you to buy private mortgage insurance (PMI). This insurance protects the lender if you stop paying, but you pay the premium. PMI typically costs 0.5 to 1.5 percent of the loan amount per year, divided into your monthly payment. On a $270,000 loan, that can add $100 to $300 per month.
You can stop paying PMI once you reach 20 percent equity in the house—either by paying down the loan or by the house appreciating in value. This usually takes 5 to 10 years, depending on your loan and the market. Until then, PMI is money that does not go toward building equity.
Down payment requirements by loan type
Different loan programs have different minimums. Conventional loans (not backed by the government) typically require 3 to 20 percent down, depending on the lender and your credit score. Some lenders will go as low as 3 percent if you have good credit and stable income. FHA loans (insured 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 often require zero down.
The catch with low down payments is that you pay more in interest and insurance over time. A 3 percent down payment on a $300,000 house means you are borrowing $291,000 and paying PMI for years. The monthly cost is higher, but the upfront cash requirement is lower—which is why these programs exist for buyers who have limited savings.
Some lenders offer down payment assistance programs, usually through nonprofits or local housing authorities. These programs may give you a grant or a second loan to cover part of the down payment. The terms vary widely by location and program, so you will need to ask your lender or a local housing counselor what is available in your area.
Where down payment money comes from and how lenders verify it
Lenders require proof that the down payment is your own money, not borrowed. They do this by asking for bank statements covering the past two months and sometimes longer. They want to see the money sitting in your account before you make an offer, because if you borrowed it, your debt-to-income ratio changes and you may not may have access to for the mortgage.
Acceptable sources for down payment funds include your savings account, checking account, money market account, and retirement accounts (though withdrawing from retirement accounts may trigger taxes and penalties). Some lenders allow gifts from family members, but you will need a signed gift letter stating that the money is a gift and does not need to be repaid. The gift letter must come from the person giving the money, not from you.
Unacceptable sources include credit cards, personal loans, and borrowed money from anyone. If you receive a gift, the lender will ask for bank statements from the gift-giver as well, to confirm the money came from their account and not from another loan. This verification process takes time, so start gathering documents early.
What happens to your down payment at closing
Your down payment is held in escrow by a title company or attorney from the time you make an offer until closing day. Escrow means the money is held by a neutral third party who releases it only when all conditions of the sale are met. If the inspection reveals major problems and you walk away, the money goes back to you (unless you waived your inspection contingency). If the lender denies your loan, the money goes back to you. If you close, the escrow agent applies your down payment to the purchase price and gives the rest to the seller.
At closing, you will also pay closing costs—fees for the appraisal, title search, lender fees, and other services. Closing costs typically run 2 to 5 percent of the purchase price and are separate from the down payment. Many buyers are surprised to learn they need cash for both. If you are putting down 10 percent and closing costs are 3 percent, you need 13 percent of the purchase price in cash before you can close.
The trade-off between saving for a larger down payment and buying sooner
Saving for a 20 percent down payment takes time. While you save, rent prices may rise, interest rates may change, and the house you want may sell to someone else. Buying sooner with a smaller down payment means you start building equity now instead of later, and you lock in today's price and interest rate. The cost is higher monthly payments and mortgage insurance.
There is no single right answer. If you have stable income and expect to stay in the house for at least five years, a smaller down payment may make sense because you will eventually pay off the PMI and build equity. If you are uncertain about your job or your location, saving for a larger down payment reduces your monthly obligation and gives you more breathing room if income drops.
Run the numbers with a mortgage calculator using different down payment amounts. Compare the monthly payment, total interest paid, and PMI cost over the life of the loan. Then decide what makes sense for your situation and your timeline.
Frequently Asked Questions
Can I use a gift from family for my down payment?
Yes, most lenders allow gifts from family members. You will need a signed letter from the gift-giver stating the amount, that it is a gift, and that no repayment is expected. The lender will verify the money came from the gift-giver's own account, not from a loan. Some lenders limit the percentage of the down payment that can be a gift, so ask your lender before accepting money.
What if I do not have 20 percent saved?
You can buy with less. Conventional loans accept 3 to 10 percent down, FHA loans accept 3.5 percent, and VA and USDA loans accept zero. The trade-off is that you pay mortgage insurance (on conventional and FHA loans) and higher monthly payments. Calculate the total cost over time to see if buying sooner makes sense for you.
Do I get my down payment back if the sale falls through?
It depends on why the sale falls through. If the lender denies your loan or the inspection reveals major problems and you have an inspection contingency, you get the money back. If you walk away without a valid reason, the seller keeps it. Read your purchase agreement carefully to understand which contingencies protect your down payment.
Is down payment the same as closing costs?
No. The down payment is your portion of the purchase price. Closing costs are fees for services like appraisals, title searches, and lender fees. You pay both at closing. Closing costs typically run 2 to 5 percent of the purchase price, so budget for both when calculating how much cash you need.
Can I borrow money for my down payment?
Most lenders do not allow it. They verify that down payment funds are yours and have been in your account for at least two months. If you borrowed the money, your debt-to-income ratio changes and you may not may have access to for the mortgage. Gifts from family are allowed, but loans are not.