What a down payment is and why lenders require it
A down payment is the amount of money you give to the seller when you buy a house. It comes from your own savings, not from the mortgage loan. If you buy a $300,000 house and put down $60,000, the lender gives you a $240,000 mortgage to cover the rest.
Lenders require a down payment because it reduces their risk. If you default on the loan and the house sells for less than you owe, the lender loses money. Your down payment is their cushion. The larger your down payment, the less risk the lender takes, which is why larger down payments often come with better interest rates and lower monthly payments.
Down payments typically range from 3 percent to 20 percent of the home's purchase price, though some loans go lower and some buyers put down more. The percentage you can put down depends on the type of loan you're getting, your credit score, and your income.
Key Takeaways
- Your down payment is money from your own savings that you give to the seller; it is not part of your mortgage loan.
- Lenders require down payments to reduce their risk, and a larger down payment usually means a lower interest rate and smaller monthly payments.
- Down payment amounts range from 3 percent to 20 percent of the home price depending on the loan type and your financial profile.
- If you put down less than 20 percent, you will pay mortgage insurance (PMI) on top of your regular loan payment until you reach 20 percent equity.
- Down payment money moves from your bank account to an escrow account, then to the seller at closing.
How down payment money moves from your account to closing
When you make an offer on a house, you typically send an earnest money deposit (usually 1 to 3 percent of the purchase price) to show the seller you are serious. This money goes into an escrow account held by a title company or attorney, not to the seller yet. If the sale falls through for reasons outside your control, you get this money back.
At closing, you bring the rest of your down payment to the title company or closing attorney. They hold all the money in escrow until the final paperwork is signed and the lender's funds arrive. Once everything is verified—the deed is recorded, the title is clear, and the lender has confirmed the loan—the escrow agent releases your down payment to the seller's account. This usually happens the same day or within one business day.
The title company or closing attorney also collects other closing costs from you at this time: property taxes, homeowners insurance, appraisal fees, and loan origination fees. These are separate from your down payment but move through the same escrow account.
Down payment amounts and what they mean for your monthly payment
A larger down payment lowers the amount you need to borrow, which directly reduces your monthly mortgage payment. On a $300,000 house at a 7 percent interest rate over 30 years, putting down 10 percent ($30,000) instead of 5 percent ($15,000) saves you roughly $100 per month.
Down payment size also affects whether you pay mortgage insurance. If you put down less than 20 percent, your lender requires you to buy private mortgage insurance (PMI). PMI typically costs 0.5 to 1.5 percent of your loan amount per year, added to your monthly payment. Once you reach 20 percent equity in the home (through a combination of down payment and paying down the loan), you can request to have PMI removed.
Some loan programs allow smaller down payments. FHA loans accept 3.5 percent down but require mortgage insurance for the life of the loan. VA loans (for military members and veterans) and USDA loans (for rural properties) sometimes allow zero down payment but have their own insurance or may provide fees.
Common down payment sources and what lenders accept
Lenders require you to document where your down payment money comes from. They want to see that you saved it yourself, not that you borrowed it. Bank statements from the past 60 days are the standard proof. If you received a gift from a family member, most lenders accept it, but you will need a signed gift letter stating the money is a gift and does not need to be repaid.
Lenders typically do not accept down payment money from credit cards, personal loans, or other borrowed sources. Some programs allow you to use funds from a retirement account (like a 401(k) or IRA) under specific conditions, but this triggers tax consequences and requires documentation from the account custodian.
If you are buying with a co-borrower, the down payment can come from either person's account or both. The lender will ask to see statements for whoever is providing the funds. Gifts can come from parents, grandparents, or other close relatives, but the gift letter must be signed by both the giver and the receiver.
What happens if you cannot save a full down payment
If you do not have 20 percent saved, you have several options. The most common is to put down what you have (even 3 to 5 percent) and pay PMI until you reach 20 percent equity. This lets you buy sooner and start building equity, though your monthly payment is higher.
Some employers, nonprofits, and state housing programs offer down payment help. These programs may give you a grant (money you do not repay) or a second loan that sits behind your mortgage. You will need to research what is available in your state and income range; there is no single national program.
Another option is to wait and save more. This delays your purchase but reduces the amount you need to borrow and may may have access to you for a better interest rate. The trade-off is that home prices and interest rates may change while you save.
Down payment timing and what to avoid
Do not make large deposits into your bank account in the weeks before closing without documenting where the money came from. Lenders review your bank statements and will ask about any unusual deposits. If you cannot explain a large deposit, the lender may delay closing or require additional proof.
Do not open new credit accounts or take on new debt while your mortgage is being processed. Lenders pull your credit report again a few days before closing. New debt can lower your credit score or change your debt-to-income ratio enough to affect your loan approval.
Do not move your down payment money to a different bank account without telling your lender. If the money is not in the account you listed on your process, the lender will ask for statements from the new account to verify the funds are yours and have been there long enough.
Frequently Asked Questions
What is the difference between a down payment and closing costs?
Your down payment is the portion of the home price you pay out of pocket; the rest is financed through your mortgage. Closing costs are separate fees for services like the appraisal, title search, loan origination, and homeowners insurance. Both come from your savings, but only the down payment reduces the amount you borrow.
Can I use my 401(k) to pay for a down payment?
Some plans allow you to borrow against your 401(k) or withdraw funds under a first-time homebuyer provision, but this triggers taxes and penalties. You will owe income tax on the withdrawn amount, and if you do not repay a loan within the required time, it counts as a distribution. Consult your plan administrator and a tax professional before doing this.
What if the house appraises for less than the purchase price?
If the appraisal comes in low, the lender will only loan based on the lower value. You then have to decide whether to pay the difference out of pocket, renegotiate the price with the seller, or walk away. Your earnest money deposit is usually refunded if you walk away due to a low appraisal.
Do I have to put down 20 percent to avoid PMI?
No. You can put down any amount from 3 to 19 percent and pay PMI until you reach 20 percent equity. PMI is an extra monthly cost, but it lets you buy sooner if you do not have 20 percent saved. Once your equity reaches 20 percent, you can request PMI removal.
What happens to my down payment if the sale falls through?
If the sale falls through because of a problem with the inspection, appraisal, or financing, your earnest money is usually refunded. If you walk away without a valid reason, you may lose the earnest money. The specific rules depend on what your purchase agreement says.