What a down payment is and why lenders require one

A down payment is money you give to the seller or lender when you buy a home. It is the portion of the purchase price you pay upfront, separate from the mortgage loan you borrow. If a house costs $300,000 and you make a $60,000 down payment, you borrow $240,000 through a mortgage.

Lenders require down payments because they reduce the lender's risk. The larger your down payment, the less money the lender has to risk if you stop paying or the home loses value. A bigger down payment also means you owe less over time, so you pay less interest overall. Down payments typically range from 3% to 20% of the home's purchase price, though some loans require more and some allow less.

The down payment comes from your own savings or other sources you control — not from the mortgage itself. This is money that leaves your bank account before the loan process begins.

Key Takeaways

  • Your down payment is the cash you provide upfront; the mortgage covers the rest of the purchase price.
  • Down payments typically range from 3% to 20% of the home price, depending on the loan type and your financial situation.
  • A smaller down payment means a larger loan, higher monthly payments, and mortgage insurance costs if you put down less than 20%.
  • Down payment money comes from savings, gifts from family, or other sources you own outright — not borrowed funds.
  • The down payment is held in escrow (a neutral third-party account) until closing, when it goes toward the purchase price.

How down payment size affects your monthly payment and loan costs

The size of your down payment directly changes how much you borrow and what you pay each month. A $60,000 down payment on a $300,000 home means a $240,000 loan. A $30,000 down payment on the same home means a $270,000 loan. The larger loan has a higher monthly payment, and you pay more interest over the life of the loan because interest is calculated on the total amount borrowed.

If your down payment is less than 20% of the purchase price, most lenders require you to pay mortgage insurance (also called PMI, or private mortgage insurance). This is an additional monthly fee that protects the lender if you default. Mortgage insurance typically costs 0.5% to 1% of the loan amount per year, added to your monthly payment. Once you have paid down the loan to 80% of the original home value, you can request to stop paying it, though the process varies by lender.

A 10% down payment versus a 20% down payment on the same home can add $100 to $300 per month to your payment, depending on the loan amount and interest rate. Over 30 years, that difference compounds significantly.

Where down payment money comes from

Down payment funds must come from sources you own or have received as a gift. The most common source is your own savings account. Some buyers use money from a retirement account, though this usually triggers taxes and penalties. Others receive a gift from a family member — parents, grandparents, or other relatives can give money toward a down payment without it being treated as a loan.

If you receive a gift, the lender will ask for a signed letter from the gift-giver stating that the money is a gift and does not need to be repaid. The lender wants to confirm you are not borrowing the down payment, because borrowed money increases your debt and changes your ability to repay the mortgage.

Some programs and nonprofits offer down payment grants or matching funds for first-time homebuyers or buyers in certain income ranges. These vary by location and change over time, so checking with your local housing authority or a mortgage lender about what may be available in your area is worth doing before you assume you must save the full amount yourself.

How the down payment moves through the closing process

When you make an offer on a home, you typically submit an earnest money deposit — usually 1% to 3% of the purchase price — to show the seller you are serious. This money is held by a title company or escrow agent (a neutral third party) and is credited toward your down payment at closing.

Before closing, you will receive a Closing Disclosure document that lists all costs, including how much of your down payment has already been deposited and how much more you need to bring. You wire or transfer the remaining down payment funds to the escrow account a day or two before closing. The escrow agent verifies the funds have arrived and are available.

At closing, the escrow agent takes all the money — your down payment plus the mortgage loan funds from the lender — and pays the seller. Your down payment is applied directly to the purchase price. The lender's loan covers the remainder. After closing, the deed is recorded in your name and you own the home.

Down payment requirements for different loan types

Conventional loans (mortgages from private lenders not backed by the government) typically require a down payment of at least 3% to 5%, though 20% is common for better interest rates and to avoid mortgage insurance. Some conventional loans require 10% or more depending on your credit score and income.

FHA loans (backed by the Federal Housing Administration) allow down payments as low as 3.5% of the purchase price. These loans are designed for first-time buyers or those with lower credit scores. FHA loans require mortgage insurance regardless of down payment size, and that insurance is built into the monthly payment for the life of the loan.

VA loans (for military members, veterans, and surviving spouses) often require zero down payment. USDA loans (for rural properties) also frequently require zero down. Jumbo loans (for homes above conventional loan limits) typically require 10% to 20% down because they carry higher risk for the lender.

What happens if you cannot save a full down payment

If you have saved 3% to 5% but not 20%, you can still buy a home with a conventional or FHA loan. You will pay mortgage insurance, which increases your monthly cost, but you build equity in the home while you pay the mortgage. As your loan balance decreases over time, you eventually reach 80% of the home's original value and can stop paying mortgage insurance.

Some buyers use a strategy called a "piggyback loan" — taking out a second, smaller loan to cover part of the down payment, which can reduce or eliminate mortgage insurance. This adds a second monthly payment, so it is not always cheaper than paying mortgage insurance, depending on interest rates.

If saving for a down payment feels out of reach, speaking with a mortgage lender about programs in your area is a practical step. Some employers, nonprofits, and local governments offer down payment grants or matched savings programs. A lender can tell you what exists where you live and what the requirements are.

Frequently Asked Questions

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

No. Lenders require that down payment funds come from your own savings or a gift from a family member. Borrowed money from friends, employers, or other sources must be disclosed and typically disqualifies you or changes your loan terms, because it increases your total debt.

What if I do not have enough for a down payment right now?

You have several options: continue saving, look for a loan program with a lower down payment requirement (FHA or USDA loans), explore down payment grants in your area, or ask a family member about a gift. A mortgage lender can walk through what is available based on your income, credit, and location.

Do I get my earnest money back if the sale falls through?

It depends on why the sale fell through. If the home inspection reveals major problems and you back out for that reason, you usually get your earnest money back. If you straightforward change your mind without a valid reason, you typically lose it. Your purchase agreement spells out the conditions under which earnest money is refunded.

Will a larger down payment lower my interest rate?

Usually yes. A larger down payment reduces the lender's risk, so many lenders offer lower interest rates to borrowers who put down 20% or more. The exact difference varies by lender and loan type, so comparing offers from multiple lenders shows you what rate you may have access to for at different down payment levels.

Can I use a home equity line of credit or 401(k) loan for a down payment?

A home equity line of credit counts as borrowed money and lenders typically will not allow it. A 401(k) loan is technically your own money, but it triggers taxes and penalties, and lenders may count it as a debt against your ability to repay the mortgage. A financial advisor or mortgage lender can explain the specific costs and consequences for your situation.