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What is a down payment on a home? (2023)

This initial payment can affect your monthly payment and interest rate

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You’re ready to become a homeowner. One of the first questions real estate agents and lenders will ask you is how much down payment you plan to make. Your down payment can influence not only the amount of mortgage you qualify for but also the interest rates you'll be offered and the overall cost of your home over time.

The National Association of Realtors (NAR) found that 35% of people it surveyed thought they needed a down payment between 16% to 20%, while 10% thought they needed more than 20% down. The good news is that you don’t need a big down payment. Instead, NAR said that the typical down payment for first-time homebuyers has been 6% to 7% since 2018.

Key insights

  • You don’t need a 20% down payment to buy your home; that is just recommended to avoid mortgage insurance costs.
  • Some loan types, like USDA and VA loans, have no minimum down payment.
  • A larger down payment can mean a lower interest rate and monthly mortgage payment.

What does it mean to put a down payment?

A down payment is the amount of money you contribute upfront to the purchase of your new home — your down payment and the loan from the lender make up the total sales price of the home you’re buying.

Most lenders require some minimum down payment because it establishes the homebuyer’s equity, or personal stake, in the property. From a bank or lender’s point of view, down payments are closely tied to default risk, which means the more equity a borrower establishes at the beginning of the loan, the more likely they are to pay back what was initially borrowed.

According to Jennifer Ashley, a former mortgage loan officer at ConsumerAffairs, if a borrower has a marginal total debt-to-income ratio, above-average assets can offset the weakness of the approval. Underwriters know that liquid assets can be used unexpectedly for bills or to support a borrower when there’s a temporary reduction in income.

Overall, the borrower must have sufficient liquid assets to make the upfront payment, pay the closing costs and cover other expenses at the time of purchase.

» MORE: How to get down payment assistance

How does a down payment work?

When you find a home you want to purchase, lenders don’t expect you to pay for the whole thing upfront. Instead, you will submit a loan application for the amount. Lenders require a down payment for most types of home loans because this helps mitigate the risk of taking you on as a borrower.

Your interest rate, monthly payments and closing costs will be calculated on the home price minus your down payment. For example, if you are buying a $350,000 home and put 3.5% down, you will pay $12,250 upfront. This means your loan total is now $337,750.

While lenders will set a minimum down payment depending on the loan type and proposed interest rate, you can always pay more toward your home purchase. However, it is important not to throw all of your savings at a down payment because you will need money set aside for emergencies — maybe mishaps that happen once you move into your home or general life issues, like a trip to urgent care or repairs for a car.

Private mortgage insurance

While 20% is not required for a down payment, paying a smaller down payment will require your loan to have private mortgage insurance (PMI). This is a protection for the lender and can be removed once your equity has reached 20%.

In some cases, you can use gift funds from family members for your down payment — but this must be approved.

Assets vs. gifts

Depending on your current financial situation and the mortgage program, you may be able to provide assets in lieu of a down payment — or you might be able to use gift money from family members. Assets are simply items of value a borrower can use to make payments in times of economic distress. The underwriter takes steps to verify the nature and the value of an asset provided by the borrower.

Depending on your loan type, lenders might require you to name the source of any significant irregular deposit. According to Ashley, the reason for so many layers of underwriting verification is to show you haven’t borrowed funds without a lender’s knowledge or received a loan for the down payment — this is not allowed.

» MORE: What is a gift letter for a mortgage?

What is the minimum down payment on a house?

Down payment requirements tend to vary by lender and loan type. Your credit score and other factors play a role in how much cash a lender will require you to put down to get a mortgage.

Loan typeMinimum down payment
Conventional (first-time buyers) 3%
Conventional (repeat buyer) 5%
FHA (credit score of 580+) 3.5%
FHA (credit score of 500 to 579 10%
VA No minimum
USDA No minimum
Jumbo Typically 10%

How to save for a down payment

You can set aside funds for a down payment in a matter of months or years, depending on how soon you plan to buy a home and how aggressive your savings plan is. The first step to creating a savings plan is to estimate how much you will need to cover the down payment and other expenses, like closing costs. Once you have an estimate, you can then decide the timeline for your savings goal.

Tactics such as setting up automatic savings in a high-yield account and reducing high-interest debt can help you get to your down payment goal faster. Additionally, saving windfall money, such as a bonus or tax refund, is helpful.

» MORE: How to save for a down payment

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    Can you get your down payment back?

    Generally, no — not without selling your home. As with any investment, you aren’t guaranteed to get back the money you initially put in. That said, of all investment types, real estate is generally one of the safer ones. Home values tend to rise over the years, which means you should be able to sell your home for more than you bought it for. This means you could get your down payment back and more.

    If you need the money back sooner, you might consider refinancing or getting a home equity loan or home equity line of credit.

    How can I buy a house with bad credit and no down payment?

    There are loan options available for individuals in various financial situations, so it’s possible to buy a house even with less-than-perfect credit and no down payment. You may want to look into USDA loans, which help those with low to moderate income buy in rural areas. If you’re active in the military or you’re a veteran, you might consider applying for a VA loan, which doesn’t require a down payment.

    You might also qualify for down payment assistance (DPA), usually provided by nonprofit organizations to promote homeownership. Just make sure to check the minimum credit score and other requirements established by each entity.

    What are down payment assistance programs?

    Down payment assistance programs are initiatives designed to help eligible homebuyers with the upfront costs of purchasing a home. These programs vary by state and can be geared toward first-time homebuyers or buyers with low to moderate incomes.

    Bottom line

    Before you start scheduling home tours, it is a good idea to know how much house you can afford and what your down payment will be. Remember, 20% doesn’t always have to be the goal, and homeownership could be closer than you think. Your down payment minimums will vary based on your lender, loan type and credit score.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. National Association of REALTORS, “Tackling Home Financing and Down Payment Misconceptions.” Accessed Aug. 23, 2023.
    2. U.S. Department of Housing and Urban Development, “Let FHA Loans Help You.” Accessed Aug. 24, 2023.
    3. U.S. Department of Veterans Affairs, “Purchase loan.” Accessed Aug. 24, 2023.
    4. U.S. Department of Agriculture, “Single Family Home Loan Guarantees.” Accessed Aug. 24, 2023.
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