What is a down payment and how much do you need?

September 8, 2022 - 10 min read

What is a down payment?

A down payment is money you contribute out of pocket when you buy a house. Most mortgage programs require a down payment between 3% and 20% of the home’s purchase price. The rest of the price is covered by your home loan.

The amount you need to save for a down payment will depend on your target home price and the type of mortgage loan you plan to use. Fortunately, down payment requirements are a lot lower than many buyers expect.

Check your down payment options. Start here

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How a down payment works

The down payment is due on closing day when you sign your final mortgage papers. You won’t hand your down payment directly to the seller. Rather, you pay it into a holding account called an “escrow account" at closing. (You’ll typically wire the funds a day or two beforehand to make sure they’re ready on time.) Your lender will then add the funds from your mortgage loan to make up the full purchase price for the seller.

Nearly every home loan requires a down payment, aside from a couple of specialized zero-down programs. Mortgage lenders require a down payment because it provides security for your loan. If you default on your mortgage, the lender will have some cash to help recover its losses. A bigger down payment equates to less risk for the lender, which is why putting more money down often leads to better interest rates and loan terms.

When you apply for a mortgage, your lender will ask for bank statements to verify that you have enough money saved for both the down payment and closing costs.

If your savings come up short, there are ways to source additional cash. For instance, you’re allowed to use gift money from a relative toward your down payment. Or your lender can help you apply for local down payment assistance programs, which could offer grants or loans to help you meet the required down payment.

Check your down payment options. Start here

Down payment example

Imagine you’re buying a $300,000 home. If you use a conventional loan, the minimum down payment is 3% of the purchase price, which comes out to $9,000. So you’d put $9,000 of your own money toward the purchase while your mortgage lender would cover the rest of the sale ($291,000 in this case). You’d pay the $9,000 down payment plus lender fees on your closing day, typically in the form of a wire transfer or cashier’s check.

How much do you need for a down payment?

Your down payment amount is largely up to you. Of course, you need to meet the minimum requirement, which starts at 0% to 3% depending on your loan program. But you’re free to make a bigger down payment if you wish. Putting more money down will ultimately lower your loan amount and reduce the amount you pay on your mortgage in the long term.

Minimum down payments for each loan program:

  • Conforming loan – 3% down (min. credit score 620)
  • FHA loan – 3.5% down (min. credit score 580)
  • VA loan – Zero down (min. credit score 580-620)
  • USDA loan – Zero down (min. credit score 640)
  • Jumbo loan – 10-20% down (min. credit score varies)

Remember that the bigger your down payment is, the better deal you’ll likely get. A bigger down payment often lowers your mortgage interest rate and reduces your mortgage payment.

Suppose your loan program requires 3% down ($9,000 on a $300,000 mortgage loan). You could get a better deal by increasing your down payment to 5 percent. That’s an additional $6,000 upfront, but it could save you more than $20,000 over the life of your loan in total interest charges.

A small minority of conventional loans (mortgages not backed by the federal government) do require you to put down 20 percent. And there are advantages to doing so. But most home buyers (and especially first-time buyers) choose to pay much less.

How much is normal for a down payment?

Many home buyers seriously overestimate the amount they need to save for a down payment. According to the National Association of Realtors (NAR), “35% of consumers think they need 16% to 20% for a down payment and 10% of consumers think they need more than 20% for a down payment. But that’s far more than most home buyers actually put down.

In fact, the typical down payment is only 13 percent. And for home buyers in their 30s, that drops to just 10 percent.

Median down payment by age group:

  • All buyers: 13%
  • Age 22-31: 8%
  • Age 32-41: 10%
  • Age 42-56: 15%
  • Age 57-66: 21%
  • Age 67-75: 28%
  • Age 76-96: 30%

Source: National Association of Realtors

Many older home buyers have already been homeowners for a long time. And their existing properties have likely accrued significant equity — meaning they can cash out on their current home in order to make a big down payment on their next home. First-time home buyers often don’t have that luxury and are more comfortable making a smaller down payment of 10% or less.

Don’t worry if your down payment savings are below the “typical” down payment for your age group. There’s no right number, and many people successfully apply with the minimum down payments listed above. Your loan officer can help you decide on the right down payment amount for your personal finances.

Check your down payment options. Start here

When and how do you pay the down payment?

The down payment is typically paid in two parts. Most buyers make a smaller earnest money deposit or “good faith deposit” within three days of making an offer on a home. Provided the sale goes through, this deposit will be credited toward your down payment at closing. So on closing day, you’ll owe the down payment minus what you already paid in earnest money.

At least three business days before you’re due to close, your lender is legally obligated to send you a five-page Closing Disclosure (CD). This document will list your final loan terms and your total “cash to close” (including the down payment and closing costs). The fees and terms on your CD should closely match the Loan Estimate you received after your original application.

Once you know the final sum for your down payment and closing costs, you can ask your bank or credit union for a certified check or cashier’s check to bring to your closing. Or you could make a wire transfer. The disclosure will give you the payee’s details.

Don’t turn up with a personal check, credit card, or debit card for your down payment. These are not allowed. In addition, lenders typically don’t accept physical cash for the down payment.

Do I need a 20% down payment?

There are very few cases where a 20% down payment is required. Only select, outside-the-box loan products require such a big deposit. In today’s market, down payments ranging from 5-10% are far more common.

However, there are two big advantages to putting down 20% or more.

  1. You’re borrowing less money, so you will have lower monthly payments and pay less interest in total
  2. You’ll avoid private mortgage insurance (PMI), which can be costly

That second point is especially important. If you put down less than 20%, you’ll likely have to pay private mortgage insurance (PMI) on conforming loans or mortgage insurance premium (MIP) on a government-backed loan. The sole exception is the VA loan, which has an upfront funding fee but no continuing mortgage insurance.

Your PMI or MIP payments are calculated annually but paid monthly along with your mortgage payment. Your Loan Estimates (the quotes you receive from lenders) will show what your PMI is likely to cost. Even on relatively modest homes, monthly PMI or MIP can often reach $100 or more. With conforming loans, you can stop paying PMI when your equity rises to 20% of your home’s value.

So, should you wait to save up 20% before you buy? That depends entirely on your personal finances and on home prices where you’re buying.

In high-cost areas, saving that much could take years. But in places where homes are more affordable, it may be an easier goal. It’s also important to consider whether a 20% down payment would drain your savings. If that’s the case, you might be better off making a smaller down payment and keeping some cash in the bank for emergencies.

Again, walk through all of your options with your loan officer to be sure you’re making the best decision for your situation.

What if I can’t make a down payment?

If you haven’t saved enough for the minimum down payment and closing costs, you might still have options. There are various ways to get assistance with your upfront home buying costs.

  1. Check if you qualify for a zero-down mortgage
  2. Apply for a local down payment assistance program
  3. Ask a relative for a cash gift

The VA loan and USDA loan programs both allow zero down payment. However, they have special restrictions. You must be a service member or veteran to qualify for a VA loan. And you must live in a qualified rural area to use the USDA mortgage. You can learn more about zero-down home loans here.

Gifted money is a perfectly legitimate way to cover your down payment, but there is a gift letter procedure you need to follow. The money you receive must be a true gift rather than a loan in disguise. And you’ll need a letter from your relation confirming that’s the case. Also, be sure to ask your lender about its policies as some have special rules concerning gift money (for instance, they may only allow funds gifted from a relative).

You may also receive help from one of the thousands of down payment assistance (DPA) programs across the country. At least one — and perhaps several — will operate where you wish to buy a home. Each of these programs sets its own rules so you have to see which suits you best and whether you qualify.

Check your home buying options. Start here

Down payment FAQ

Why is a down payment required? 

Your down payment provides security for your mortgage lender. Down payments help lenders keep cash in the bank so that, if something goes wrong and they have to foreclose on your mortgage loan, they don’t lose money. That’s why bigger down payments are considered less risky and rewarded with lower mortgage rates.

When do you pay the down payment? 

The majority of your down payment is paid on closing day when you sign your final mortgage papers and take ownership of the home. It’s part of your cash-to-close amount, along with closing costs. If you paid an earnest money deposit when you made an offer on the home, this will be credited toward your down payment at closing.

Is a down payment part of the loan?

Your down payment is not part of your mortgage loan and cannot be included in your loan balance. Rather, it’s the portion of your home’s purchase price that the lender is not covering. If you put down 3 percent on a $300,000 home, you’ll pay $9,000 out of pocket. And your mortgage loan will cover the remaining $291,000.

Does the down payment get returned?

No. Your down payment helps cover the home’s sale price and will be paid to the seller along with funds from your mortgage lender to complete the transaction.

Do I need 20 percent down?

Definitely not. There are plenty of loan programs that allow less than 20 percent down. And in fact, only home buyers aged 56 and up put more than 20 percent down on average. First-time home buyers are more likely to make a down payment in the range of 5 to 10 percent.

Can I buy a house with no down payment? 

Not normally. But there are two common loans that do allow zero down. First is the VA loan. To qualify, you or your spouse must be currently serving in the military or honorably discharged after sufficient years of service. Second is the USDA loan. This is only available to low- and moderate-income buyers in rural areas. But USDA’s definition of rural is surprisingly lenient. So check with your lender to see whether your home qualifies.

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Peter Warden
Authored By: Peter Warden
The Mortgage Reports Editor
Peter Warden has been writing for a decade about mortgages, personal finance, credit cards, and insurance. His work has appeared across a wide range of media. He lives in a small town with his partner of 25 years.