What a down payment is and why lenders ask for one

A down payment is the cash you give the seller at closing — the percentage of the home's price you pay out of pocket before the lender funds the rest. If you buy a $300,000 house with a 20% down payment, you pay $60,000 and borrow $240,000. The lender wants to see you have skin in the game because if you walk away or stop paying, they can foreclose and sell the house, but they may not recover the full loan amount if the market drops.

The amount you need depends on the type of loan you get, not on a fixed rule. Conventional loans (the most common kind, sold to investors like Fannie Mae) typically require 3% to 20% down. Federal Housing Administration (FHA) loans, backed by the government, allow as little as 3.5% down. Veterans Affairs (VA) loans and United States Department of Agriculture (USDA) loans in rural areas often require zero down. The lower your down payment, the higher your monthly payment and the more interest you pay over the life of the loan.

Key Takeaways

  • Down payments range from 0% to 20% depending on the loan type, with conventional loans most commonly requiring 3% to 20%.
  • A smaller down payment means a larger loan, higher monthly payments, and mortgage insurance costs that add hundreds of dollars per year.
  • The down payment amount affects whether you pay private mortgage insurance (PMI), which protects the lender but costs you money each month.
  • Saving for a down payment takes months or years for most people, so understanding what amount you actually need helps you set a realistic timeline.

How down payment size changes your monthly cost

The difference between a 3% and 20% down payment on the same house is dramatic. On a $300,000 home at 7% interest over 30 years, a 3% down payment ($9,000) means you borrow $291,000 and your principal-and-interest payment is roughly $1,935 per month. A 20% down payment ($60,000) means you borrow $240,000 and your payment drops to roughly $1,596 per month — a difference of $339 every month, or $4,068 per year.

That gap widens when you add mortgage insurance. With less than 20% down on a conventional loan, you pay private mortgage insurance (PMI), which protects the lender if you default. PMI typically costs 0.5% to 1.5% of your loan amount per year, split into monthly payments. On a $291,000 loan, that could be $120 to $365 per month. Once you build 20% equity in the home (through payments and appreciation), you can request PMI removal, but until then it is a cost you cannot avoid.

Down payment requirements by loan type

Conventional loans are mortgages sold to investors and are not backed by the government. Most lenders require 3% to 5% down for first-time buyers, though some require up to 20%. The lower your down payment, the higher your interest rate and the mandatory PMI cost. If you put down less than 20%, you will pay PMI until you reach 20% equity.

FHA loans are backed by the Federal Housing Administration and allow down payments as low as 3.5%. They are designed for buyers with lower credit scores or less savings. The trade-off is that FHA loans require mortgage insurance for the life of the loan if you put down less than 10%, and for at least 11 years if you put down 10% or more. This insurance is called mortgage insurance premium (MIP) and costs roughly 0.55% to 0.85% of your loan per year.

VA loans are available to military members, veterans, and surviving spouses. They require zero down payment and no mortgage insurance. The lender charges a one-time funding fee (1% to 3.3% of the loan) instead, which you can roll into the loan amount. USDA loans for rural properties also require zero down and no mortgage insurance, though they do charge a may provide fee.

What happens if you cannot save 20% down

Most first-time buyers do not put down 20%. According to the National Association of Realtors, the median down payment for first-time buyers is around 6% to 7%. Putting down 3% to 5% is common and does not disqualify you from homeownership — it just means you will pay PMI or MIP until you build equity.

If you are short on cash, consider whether you can delay buying for a few months or years to save more, or whether a lower down payment makes sense given your income and job stability. A smaller down payment is a trade-off: you buy sooner but pay more per month. A larger down payment means waiting longer but lower monthly costs. There is no single right answer — it depends on your situation.

Some employers, nonprofits, and state housing programs offer down payment help grants or low-interest loans that do not have to be repaid. These are separate from the mortgage itself and can reduce the cash you need to bring to closing. Ask your lender or local housing authority whether programs exist in your area.

How lenders verify you have the down payment

When you explore for a mortgage, the lender will ask for bank statements showing the down payment funds. They want to see that the money is yours, not borrowed from someone else (because borrowed money increases your debt-to-income ratio and your risk). If a family member is giving you money as a gift, most lenders allow it, but they require a signed gift letter stating the money does not have to be repaid.

The lender will also verify that the funds have been in your account for at least two months (called "seasoning"). This prevents you from borrowing money at the last minute to artificially inflate your savings. If you received a large deposit recently, be prepared to explain where it came from — a bonus, tax refund, or inheritance all count, but you may need documentation.

Down payment versus closing costs

The down payment is separate from closing costs, and many first-time buyers confuse the two. Closing costs are fees paid to the lender, title company, appraiser, and inspector — typically 2% to 5% of the home price. On a $300,000 house, closing costs might be $6,000 to $15,000. You pay these in addition to the down payment, so your total cash at closing could be 5% to 25% of the home price depending on your loan type and the costs in your area.

Some lenders allow you to roll closing costs into the loan (called "no-cost" or "low-cost" mortgages), but this increases your loan amount and your monthly payment. Others allow the seller to pay your closing costs as part of the negotiation, which reduces your out-of-pocket expense. Ask your lender what closing costs are required in your state and whether any can be covered by the seller.

Frequently Asked Questions

Can I put down less than 3%?

Some lenders offer 1% to 2% down programs, but they are rare and usually require excellent credit, a stable income, and a lower purchase price. FHA loans cap out at 3.5% down. VA and USDA loans allow zero down. If you are short on funds, ask your lender whether they offer low-down-payment options or whether you may have access to for a state or local down payment information program.

What if I put down more than 20%?

Putting down more than 20% reduces your loan amount, lowers your monthly payment, and eliminates PMI entirely. It also may lower your interest rate because you are a lower-risk borrower. The downside is that you tie up cash that could be invested elsewhere or kept as an emergency fund. There is no penalty for a larger down payment, so the choice depends on whether you have the money and whether you need liquidity.

Do I have to put down the same percentage as my friend?

No. Down payment requirements vary by lender, loan type, credit score, and income. Your friend's loan terms do not affect yours. Shop around with at least three lenders to compare down payment requirements, interest rates, and PMI costs — the difference can save you thousands of dollars over the life of the loan.

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

If the appraisal comes in lower than the agreed price, your down payment percentage increases because you are borrowing against the lower appraised value. For example, if you agreed to pay $300,000 with 10% down ($30,000) but the house appraises at $280,000, the lender will only loan 90% of $280,000 ($252,000), so you need to bring an extra $18,000 to closing or renegotiate the price with the seller.

Can I borrow my down payment from a family member?

Most lenders allow down payment gifts from family, but they require a signed gift letter stating the money is a gift and does not have to be repaid. Some lenders also require the gift giver to document where the money came from. Borrowed money (a loan from a family member or friend) counts as debt and increases your debt-to-income ratio, which may disqualify you or lower the amount you can borrow.