What First-Time Buyers Put Down and Why It Matters

A down payment is the cash you hand over on the day you close on a house. It is the difference between the home's sale price and the amount you borrow from a lender. If a house costs $300,000 and you put down $60,000, you borrow $240,000 as a mortgage.

The size of your down payment affects three things: how much you borrow, how much interest you pay over the life of the loan, and whether you have to pay private mortgage insurance (PMI). PMI is an extra monthly fee that protects the lender if you stop paying. Most lenders require it when your down payment is less than 20 percent of the home's price.

First-time buyers often believe they need 20 percent down. They do not. Many programs and lenders accept 3 to 5 percent down. The trade-off is a higher monthly payment and PMI costs, but you can buy sooner and with less cash saved up front.

Key Takeaways

  • Down payments range from 3 to 20 percent depending on the loan type, and you do not need 20 percent to buy a home as a first-time buyer.
  • Putting down less than 20 percent triggers private mortgage insurance, which adds $100 to $300 per month to your payment depending on the loan size and your credit score.
  • Federal Housing Administration loans, VA loans, and USDA loans each have different down payment rules and are designed for specific buyer situations.
  • Your down payment comes from your own savings, gifts from family members, or down payment information programs run by state and local governments.
  • The lender will verify where your down payment money came from and may require bank statements showing the funds were in your account for at least two months.

Down Payment Amounts by Loan Type

The type of mortgage you get determines the minimum down payment the lender will accept. Conventional loans (mortgages not backed by a government agency) typically require 5 to 20 percent down, though some lenders go as low as 3 percent. The lower your down payment, the higher your interest rate and the more you pay in PMI.

Federal Housing Administration (FHA) loans allow down payments as low as 3.5 percent of the purchase price. FHA is a government agency that insures the loan, meaning it promises to cover the lender's loss if you default. Because the government backs the loan, lenders can afford to take on buyers with lower down payments and lower credit scores. FHA loans require mortgage insurance for the life of the loan, not just until you reach 20 percent equity.

VA loans (for military members, veterans, and surviving spouses) often require zero down payment. The Department of Veterans Affairs guarantees the loan, so lenders do not need you to put money down. VA loans do not require PMI. This is one of the largest advantages of VA may be able to access.

USDA loans (for rural homebuyers) also allow zero down payment in most cases. The U.S. Department of Agriculture guarantees these loans for properties in designated rural areas. Like VA loans, USDA loans do not require PMI.

How Private Mortgage Insurance Works and What It Costs

When your down payment is less than 20 percent on a conventional loan, the lender requires you to buy PMI. This is not optional — it is a condition of the loan. PMI protects the lender, not you. If you stop paying your mortgage, PMI covers part of the lender's loss.

PMI costs vary based on your down payment size, credit score, and loan amount. A typical range is 0.5 to 1.5 percent of the loan amount per year, paid monthly. On a $240,000 loan, that could be $100 to $300 per month. The lower your down payment and credit score, the higher the PMI rate.

On a conventional loan, you can remove PMI once you reach 20 percent equity in the home (either through payments or home appreciation). You must request the removal in writing, and the lender may require a new appraisal to confirm the home's value. FHA loans do not allow PMI removal — you pay it for the life of the loan if your down payment was less than 10 percent.

Where Down Payment Money Comes From

Lenders require you to prove that your down payment money is yours and that you did not borrow it. They do this by asking for bank statements, usually covering the last two months before closing. The lender wants to see that the funds were in your account for a reasonable period — typically at least 60 days — so you cannot borrow money the day before closing and claim it as your own savings.

Down payment sources that lenders accept include your own savings, gifts from family members (parents, grandparents, siblings), and down payment information programs. If you receive a gift, the person giving it must sign a gift letter stating it is a gift, not a loan, and that they do not expect repayment. The lender will ask to see the gift letter and proof that the money moved from the gift-giver's account to yours.

Down payment information programs are run by state housing finance agencies, local housing authorities, and nonprofits. These programs provide grants or low-interest loans to first-time buyers. Some programs are income-based, some target specific professions (teachers, nurses, first responders), and some focus on specific neighborhoods. Your real estate agent or mortgage lender can point you toward programs in your area, or you can search your state's housing finance agency website.

How Down Payment Affects Your Monthly Payment

A larger down payment lowers your monthly mortgage payment in two ways: you borrow less money, and you may avoid or reduce PMI. The difference is significant over 30 years.

On a $300,000 home with a 6 percent interest rate, putting down 3 percent ($9,000) means borrowing $291,000. Your principal and interest payment is roughly $1,745 per month, plus PMI of $150 to $250 per month, for a total of around $1,895 to $1,995. Putting down 20 percent ($60,000) means borrowing $240,000, with a principal and interest payment of around $1,439 per month and no PMI. The difference is $450 to $550 per month, or $5,400 to $6,600 per year.

However, the choice is not just about the monthly payment. If you put down 3 percent now, you can buy a home sooner and build equity while you continue saving. If you wait to save 20 percent, you may rent for several more years and build no equity at all. The math depends on your local rent prices, home price trends, and how long you plan to stay in the home.

Closing Costs and Other Money You Need at Closing

Your down payment is separate from closing costs. Closing costs are fees paid to the lender, title company, appraiser, inspector, and local government. They typically range from 2 to 5 percent of the loan amount. On a $240,000 loan, closing costs might be $4,800 to $12,000.

Closing costs include the loan origination fee (paid to the lender), title insurance (protects you and the lender against ownership disputes), appraisal fee (the lender's assessment of the home's value), home inspection (your own inspection, optional but recommended), property taxes, homeowners insurance, and recording fees. Some of these costs can be negotiated or rolled into the loan, but most must be paid in cash at closing.

First-time buyers often confuse down payment and closing costs. You need both. If you are putting down 3 percent on a $300,000 home, you need $9,000 for the down payment plus $4,800 to $12,000 for closing costs — a total of $13,800 to $21,000 in cash before you can close.

Down Payment information Programs and What They Offer

Most states and many cities run down payment information programs specifically for first-time buyers. These programs provide grants (money you do not repay) or forgivable loans (loans that disappear if you stay in the home for a set period). Some programs cover part of your down payment; others cover closing costs; some cover both.

may be able to access usually depends on income (most programs serve buyers earning 80 to 120 percent of the area median income), first-time buyer status (you have not owned a home in the past three years), and the property location (some programs focus on specific neighborhoods or rural areas). A few programs target specific professions: teachers, nurses, firefighters, and police officers often have dedicated information programs.

To find programs in your area, start with your state's housing finance agency website. Search "[your state] housing finance agency" or "[your state] down payment information." You can also call 211 (a referral service) and ask for down payment information programs. Your mortgage lender or real estate agent may also know about local programs, though they do not always mention them unless you ask.

Frequently Asked Questions

Can I borrow my down payment from someone other than a family member?

No. Lenders require that down payment money come from your own savings or a gift from a family member. Borrowed money — from a friend, employer, or personal loan — disqualifies the funds. The lender will ask where the money came from, and if they discover it was borrowed, they may deny the loan or require you to repay the borrowed amount before closing.

What happens if I do not have enough money for both down payment and closing costs?

You can ask the seller to pay some of your closing costs as part of the purchase agreement. This is called a seller concession. Lenders allow sellers to cover 3 to 6 percent of the purchase price in closing costs, depending on the loan type. You can also look for down payment information programs that cover closing costs, or ask a family member to gift money for closing costs separately from the down payment.

Can I remove PMI before I reach 20 percent equity?

On a conventional loan, you can request PMI removal once you reach 20 percent equity through a combination of payments and home appreciation. You must request it in writing, and the lender may require a new appraisal. On an FHA loan, PMI cannot be removed if your down payment was less than 10 percent — you pay it for the life of the loan.

Do I have to put down the same percentage as my credit score suggests?

No. Your credit score affects the interest rate you are offered, not the down payment requirement. A buyer with a 620 credit score and a 3 percent down payment may pay a higher interest rate than a buyer with a 750 credit score and the same down payment, but both can use the same loan program. However, some lenders have minimum credit score requirements for low down payment loans.

What if the home appraises for less than the purchase price?

If the appraisal comes in lower than the agreed price, your down payment percentage increases. If you agreed to buy a $300,000 home with 5 percent down ($15,000) but it appraises at $280,000, you now have a 5.4 percent down payment. You can renegotiate the price with the seller, increase your down payment to keep the same percentage, or walk away from the deal (depending on your contract terms).