What a down payment is and why lenders require one

A down payment is the amount of money you contribute toward the purchase price of a home at closing. The lender finances the rest through a mortgage loan. If you buy a $300,000 house and put down $60,000, the lender gives you a $240,000 mortgage.

Lenders require down payments because they reduce the lender's risk. If you default on the loan and the house sells for less than you owe, the lender absorbs the loss. A larger down payment means the lender has less exposure. It also signals that you have savings and are financially committed to the purchase — you have skin in the game.

The down payment comes from your own money, not from the loan. You bring it to closing in the form of a cashier's check, wire transfer, or certified funds. The title company or escrow agent holds it until all conditions are met, then releases it to the seller's account.

Key Takeaways

  • Down payments typically range from 3 percent to 20 percent of the home's purchase price, depending on the loan type and your financial profile.
  • Conventional loans usually require 5 to 20 percent down; FHA loans allow as little as 3.5 percent; VA and USDA loans may require zero down.
  • Putting down less than 20 percent usually triggers private mortgage insurance (PMI), which adds to your monthly payment until you reach 20 percent equity.
  • Your down payment funds come from savings, gifts from family members, or sometimes employer programs, but never from borrowed money or the mortgage itself.
  • The down payment is separate from closing costs, which typically run 2 to 5 percent of the purchase price and cover appraisals, inspections, title work, and lender fees.

How down payment percentages work across loan types

The percentage you need to put down depends on the type of mortgage you are seeking. Conventional loans — mortgages not backed by a government agency — typically require 5 to 20 percent down. Some lenders will go as low as 3 percent for borrowers with strong credit and stable income, but 5 to 10 percent is more common.

FHA loans, insured by the Federal Housing Administration, allow down payments as low as 3.5 percent. These loans are designed for first-time buyers and people with lower credit scores or less savings. The trade-off is that FHA loans require mortgage insurance regardless of how much you put down, and that insurance stays on the loan for the life of the loan if you put down less than 10 percent.

VA loans, available to military members, veterans, and some surviving spouses, often require zero down payment. USDA loans, for rural properties, also typically require zero down. Both come with their own insurance or may provide fees, but the barrier to entry is lower than conventional or FHA loans.

Jumbo loans — mortgages above the conforming loan limit, which varies by county but is often around $766,000 — typically require 10 to 20 percent down because they carry more risk for the lender.

What happens when you put down less than 20 percent

If your down payment is less than 20 percent of the purchase price, your lender will require private mortgage insurance (PMI) on a conventional loan. PMI protects the lender if you stop paying; it does not protect you. The cost is typically 0.5 to 1.5 percent of the loan amount per year, added to your monthly mortgage payment.

On a $240,000 loan with PMI at 1 percent annually, you would pay roughly $200 per month in insurance on top of principal, interest, and taxes. That amount stays on your bill until you reach 20 percent equity in the home — either through paying down the principal or through the home appreciating in value.

FHA loans require mortgage insurance regardless of down payment size. If you put down 3.5 percent, you pay an upfront insurance premium (usually 1.75 percent of the loan amount) plus an annual premium (0.55 to 0.8 percent) for the life of the loan. If you put down 10 percent or more on an FHA loan, the annual premium drops off after 11 years.

VA and USDA loans do not require PMI, but they do charge a funding fee (VA) or may provide fee (USDA) at closing, which can be rolled into the loan amount.

Where down payment money comes from

Your down payment must come from your own funds or from specific sources that lenders consider acceptable. The most straightforward source is your savings account — money you have accumulated over time. Lenders will ask to see bank statements, usually for the last two months, to verify the funds are there and have been there long enough to show they are not borrowed.

Family gifts are another common source. A parent, grandparent, or other relative can give you money toward your down payment without it being treated as a loan. However, the lender will require a gift letter — a signed statement from the gift-giver confirming the money is a gift, not a loan, and that they have no expectation of repayment. The gift-giver does not need to be a co-borrower on the mortgage.

Some employers offer down payment information programs as an employee benefit. These may be grants (money you do not repay) or forgivable loans (loans that are forgiven if you stay with the company for a set period). If your employer offers this, ask your HR department for the terms and how the process works.

Retirement account withdrawals are possible but come with tax consequences. Some plans allow you to withdraw funds penalty-free for a first-time home purchase, but you will still owe income tax on the withdrawal. Consult a tax professional before going this route.

One source that is never acceptable: borrowed money. You cannot take out a personal loan, credit card advance, or line of credit to fund your down payment. Lenders consider this additional debt that affects your ability to repay the mortgage. If you are caught doing this, the lender can deny the loan or demand repayment before closing.

Down payment versus closing costs — why they are separate

Many first-time buyers confuse down payment with closing costs, but they are two different expenses. Your down payment goes toward the purchase price and builds equity in the home. Closing costs are fees paid to third parties for services related to the transaction.

Closing costs typically include an appraisal (to verify the home's value), a title search and insurance (to confirm you are buying from the legal owner), a home inspection (optional but recommended), loan origination fees, underwriting fees, and property taxes or homeowners insurance prepayment. These costs usually run 2 to 5 percent of the purchase price — on a $300,000 home, that is $6,000 to $15,000.

You pay both at closing. If you are putting down $60,000 and closing costs are $9,000, you need to bring $69,000 in total funds to closing. Some lenders allow you to roll closing costs into the loan, but this increases the amount you borrow and the interest you pay over time. Some sellers will agree to pay part of your closing costs as a negotiation point, but this is separate from the down payment.

How to save for a down payment strategically

If you are saving toward a down payment, the timeline and target amount depend on your situation. A 20 percent down payment avoids PMI but requires significant savings. A 5 to 10 percent down payment gets you into a home sooner, though you will pay insurance until you reach 20 percent equity.

High-yield savings accounts currently offer interest rates between 4 and 5 percent annually, making them a reasonable place to park down payment funds while you save. Money market accounts work similarly. Avoid investing down payment money in stocks or other volatile assets if you plan to buy within the next two to three years — a market downturn could reduce your savings right when you need them.

If you are a first-time buyer, some states and cities offer down payment information programs through nonprofits or government agencies. These may be grants, forgivable loans, or matched savings programs. Your local housing authority or a HUD-approved housing counselor can tell you what is available in your area. These programs have income limits and other requirements, and they vary widely by location.

Delaying a purchase to save more is often smarter than stretching to buy now. A larger down payment means a smaller loan, lower monthly payments, and no PMI. The math usually favors waiting six months to a year if it means avoiding insurance costs.

What lenders verify about your down payment

During the mortgage process, your lender will verify that your down payment funds are real and that you actually have them. This is called source of funds verification. You will need to provide bank statements showing the money in your account, usually for the two months before you explore.

If there is a large deposit that appears suddenly, the lender will ask where it came from. If it is a gift, you will need the gift letter. If it is a bonus or tax refund, you may need a pay stub or tax return. The lender is checking that you did not borrow the money and that the funds are genuinely available.

At closing, you will wire or bring a cashier's check for the down payment amount. The title company or escrow agent will verify the funds have been received before releasing documents for signing. If the funds do not arrive, closing is delayed until they do.

Frequently Asked Questions

Can I borrow my down payment from someone?

No. Lenders will not allow you to borrow down payment funds, even from family. If you receive money as a loan, it counts as debt on your credit report and reduces your borrowing power. A gift is acceptable; a loan is not. If a family member gives you money, get a gift letter in writing.

What if I do not have 20 percent saved?

You do not need 20 percent to buy a home. FHA loans allow 3.5 percent down, conventional loans often allow 5 to 10 percent, and VA or USDA loans may allow zero down. The trade-off is that lower down payments trigger PMI or other insurance, which adds to your monthly cost. Calculate the total monthly payment with insurance to see if it fits your budget.

Can I use my 401(k) for a down payment?

Some retirement plans allow penalty-free withdrawals for a first-time home purchase, but you will owe income tax on the amount withdrawn. This can be a significant tax bill. Consult a tax professional or financial advisor before withdrawing from retirement savings, as it may not be the best option for your situation.

Do I have to bring the down payment in cash at closing?

No. You bring it as a wire transfer, cashier's check, or certified funds. The title company or escrow agent will specify which methods they accept. Personal checks are usually not accepted because they can bounce. Verify the wire instructions with the title company directly — do not rely on email alone, as wire fraud is common.

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

If the appraisal comes in low, the lender will only finance up to the appraised value. If you agreed to pay $300,000 but it appraises at $280,000, the lender will only lend on $280,000. You have three options: renegotiate the price with the seller, bring additional cash to closing to make up the difference, or walk away. Your down payment is at risk if you walk away, depending on your contract terms.