What Is a Down Payment on a House?

Written by Kim PinnelliReviewed by Nathan Brown, CFP®Updated: 13th Oct 2022
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Putting money down on the house is the largest obstacle most homebuyers face, especially first-time homebuyers.

But most people believe myths about the required down payment. The truth is you don’t need 20% down to buy a house.

So how much do you need?

Find out what a down payment is on a house and more in our guide below.

What Is a Down Payment on a House?

A down payment is your investment in the home. Most mortgages require you to invest at least a little of your own money outside of the loan.

It gives you’ skin in the game,’ providing lenders with the reassurance that you’ll repay your loan and not risk losing the money you invested in the home.

The down payment is a part of the sales price and reduces the amount of money you must borrow to buy the home. You pay the money at the closing and the loan closing costs.>> More: Best Mortgage Lenders

How Does a Down Payment on a House Work? Example.

The down payment is a percentage of the sales price. For example, if you offer $300,000 on a home and the lender requires a 10% down payment, you’d put down $30,000 on the house and borrow $270,000.

Each lender and loan program has different down payment requirements, so it’s always good to shop around, especially if you don’t have a large down payment saved.

You must have the money available in a liquid account, such as a checking, savings, or stockbroker account.

You’ll provide a cashier’s check or wire at the closing. The closing agent adds the down payment to the loan proceeds to pay the seller the full sales price.

Remember, the down payment is separate from the closing costs. Most loans have closing costs between 3% – and 5% of the loan amount. Using our example above, you’d need an extra $8,100 to $13,500 for closing costs.

Smaller vs. Larger Mortgage Down Payments: What Is Smarter?

Everyone wants to know – what’s the right down payment? Is a larger down payment better than a smaller down payment?

The answer is it depends.

If you have a low credit score and barely qualify for the loan, a larger down payment can be a compensating factor, giving the lender a reason to approve your loan.

If you have great credit, a large down payment may not be an issue when approving you for the loan.

But there’s more to consider. The more money you invest upfront, the less money you borrow. When you borrow less money, you pay less interest over the life of the loan.

But there’s a tradeoff. If you make a large down payment, putting down all your liquid assets, you don’t have any money to fall back on in an emergency. What if you lose your job or another investment you have tanks? You could find yourself in financial trouble.

So, the answer to ‘what’s better, a smaller or larger down payment?’ is it depends on your circumstances.

A large down payment isn’t a bad idea if you have more money set aside. But, if you’d clean yourself out, make the smaller down payment and keep some of your money liquid, just in case.

Mortgage Down Payment Minimum Requirements

Each loan has a different minimum down payment requirements. Here are the general guidelines.

VA Loans

VA loans are for veterans or active military members with at least 181 days of service. What’s amazing about this program is veterans and their families don’t need a down payment.

You can borrow 100% of the sales price. This doesn’t mean you can’t make a down payment, and if you have the money, it’s not a bad idea.

>> More: Best VA Loan Lenders

FHA Loans

FHA loans are great for borrowers with less-than-perfect credit and little money to put down. The FHA requires just a 3.5% down payment.

If you have at least a 640 credit score, they’ll even allow you to accept 100% of the funds as a gift, meaning you may not put any of your own money into the home but instead use money others gift to you.

If you have a credit score between 500 – and 579, though, you’ll need a 10% down payment. It’s a little-known fact about FHA loans. Most people assume they won’t qualify, but a high down payment will do the trick.

>> More: Best FHA Lenders

Conventional Mortgages

Conventional loans are the ‘stricter’ loan option. They require higher credit scores, but the down payment requirements aren’t that bad!

If you’ve never owned a home, you need only 3% down on the house. But, if you’re a subsequent homebuyer, a 5% down payment is necessary.

USDA Loans

USDA loans are a government-backed program to help very low to low-income families.

If you don’t qualify for any other loan program, the USDA program may help as it has flexible underwriting guidelines, including 0% down payment requirements.

You can borrow 100% of the sales price on a modest home in the area.

What Are the Benefits of a Larger Down Payment Loan?

Larger down payment comes with numerous benefits. Here are a few of the benefits that make it worth it and a smart financial decision.

Competitive Interest Rate

The more money you invest (the less you borrow), the lower your risk to the lender.

This usually leaves you with a more competitive interest rate because lenders base your interest rate on your risk of default.

Other factors also influence your APR, but the down payment (your investment) is a large factor.

Fewer Fees

Lenders often charge fewer fees when you invest a lot of your own money into the home. You’ll see the largest difference in the origination fee.

This is an upfront fee charged in ‘points‘ or a percentage of the loan amount. Lenders charge it when they feel your loan is a high risk of default.

Since a large down payment lowers your risk of default, it may also lower your origination fees.

Lower Monthly Payments

The less money you borrow, the less interest you pay. This lowers your monthly payments, especially if a lender gives you a lower interest rate in exchange for the higher down payment.

Mortgage payments consist of principal (a portion of the amount you borrowed) and interest charges.

Some loan payments also include mortgage insurance, which increases your monthly payment. If you put down less than 20% on the home or borrow an FHA or USDA loan, you’ll pay mortgage insurance, which increases your payment.

More Home Equity

A down payment is a direct investment in your home. You instantly own that portion of the house.

As you pay your mortgage balance down, you increase your quietly, but that takes time. For the first couple of years, your mortgage payments consist of mostly interest and ‘a little’ principal.

If you make a large down payment, you have a decent investment in your home. If you got into financial trouble, you could either refinance the home and take out some of the equity (not all of it, lenders won’t allow it) or sell your home and earn the equity back.

Avoid PMI

Conventional loans only charge PMI if you borrow over 80% of the home’s value. PMI is Private Mortgage Insurance, and you only pay it until you pay the balance down to less than 80% of the home’s value.

If you make at least a 20% down payment, you’ll never pay PMI. If you make less than a 20% down payment, you’ll pay PMI until you can cancel it at an 80% loan-to-value ratio.

Why Do Mortgage Lenders Require A Down Payment?

Lenders require a mortgage payment for a few reasons:

  • Reduces your risk of default – When you invest your money in the home, you’re more likely to do what it takes to make your payments and not lose the house (and your money).
  • Lowers the lender’s investment – If the lender has to foreclose on your property, they’ll have less money invested, which means they can accept a lower price for it, moving it off their inventory without taking a major loss.

First-Time Homeowners Down Payments: How Much Should I Put Down?

The down payment is often the largest struggle for first-time homebuyers. Between paying for rent and other obligations, it’s hard to save enough money to put down on a home.

Fortunately, most loan programs don’t require a large down payment – the highest is 3.5%, but that doesn’t mean that you shouldn’t invest it if you have the money. Just don’t think you can only get a home with a 20% down payment – there are other options.

Decide how much you are comfortable putting down, along with what mortgage payment you’re comfortable paying each month.

A larger down payment lowers your monthly payment, but if it stresses you out financially, consider making the minimum down payment on a house.

What Is the Minimum Down Payment on a House?

The minimum down payment on a house depends on the loan program you use. Some programs, like the VA and USDA programs, don’t require a down payment. Others require between 3.0% – 3.5% down on a home.

Bottom Line: What Is a Down Payment on a House?

The down payment is an important part of buying a house. We feel you should put at least some money down, even if you use a 0% down payment program.

It gives you equity in the home, lowers your payment, and gives you a feeling of responsibility, knowing that you don’t want to default on your mortgage or you’ll lose your investment.

Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.