What Is a Down Payment?
A down payment is the portion of a home's purchase price that you pay upfront in cash at closing. It is expressed as a percentage of the purchase price — for example, a 10% down payment on a $400,000 home is $40,000. The remaining balance is financed through your mortgage. The size of your down payment affects your loan type eligibility, monthly payment, interest rate, and whether you'll owe private mortgage insurance.
How Down Payments Affect LTV and PMI
Your down payment directly determines your loan-to-value ratio (LTV). LTV is calculated by dividing the loan amount by the home's appraised value. A higher down payment means a lower LTV, which signals less risk to the lender.
On conventional loans, an LTV above 80% — meaning a down payment below 20% — triggers a requirement for private mortgage insurance (PMI). PMI protects the lender if you default. It typically costs 0.5% to 1.5% of the loan amount per year, added to your monthly payment, and can be removed once your LTV reaches 80%.
See What Is PMI? for a full explanation, and use the PMI Calculator to estimate your monthly PMI cost. To understand how LTV is calculated, see What Is Loan-to-Value Ratio?
Minimum Down Payments by Loan Type
Different loan programs carry different minimum down payment requirements. Government-backed loans typically offer lower minimums than conventional loans:
| Loan Type | Minimum Down Payment | Notes |
|---|---|---|
| Conventional | 3% | Requires PMI if less than 20%; credit score requirements apply |
| FHA | 3.5% (10% if credit score 500–579) | MIP required for life of loan if down payment under 10% |
| VA | 0% | Available to eligible veterans and active-duty service members |
| USDA | 0% | Available in eligible rural and suburban areas; income limits apply |
Use the FHA Loan Calculator to model FHA loan payments at 3.5% down, including the FHA mortgage insurance premium.
The 20% Down Myth: You Don't Have to Wait
Many buyers believe they must save 20% before purchasing a home. That is a myth. Numerous loan programs allow far smaller down payments, and waiting years to save 20% can mean missing out on home price appreciation and equity building.
That said, putting down less than 20% does have real costs: you'll pay PMI (on conventional loans) or a mortgage insurance premium (on FHA loans), your monthly payment will be higher, and you'll have less equity cushion if home values dip. The right down payment is the one that balances your savings, cash flow, and homeownership timeline — not an arbitrary threshold.
Down Payment Assistance Programs
If saving for a down payment is the main barrier, you may qualify for assistance. Down Payment Assistance (DPA) programs are offered by state housing finance agencies, local governments, and nonprofits. They come in several forms:
- Grants: Money that does not need to be repaid, typically for first-time buyers meeting income limits.
- Forgivable loans: A second loan that is forgiven after you remain in the home for a set number of years.
- Deferred-payment loans: A second loan with no monthly payments due until you sell or refinance.
The U.S. Department of Housing and Urban Development (HUD) maintains a directory of HUD-approved housing counselors and local DPA programs. Eligibility typically depends on income, purchase price, and whether you are a first-time buyer (defined as not having owned a home in the past three years).
Where to Save for a Down Payment
Common vehicles for accumulating a down payment include:
- High-yield savings account (HYSA): FDIC-insured, liquid, and earns meaningful interest — the simplest option for a near-term purchase.
- Gift funds: Many loan programs allow the down payment to be a gift from a family member, but you must document the gift with a letter confirming it is not a loan.
- 401(k) hardship withdrawal or loan: First-time homebuyers may withdraw up to $10,000 from an IRA penalty-free. 401(k) rules vary by plan; borrowing from your retirement account has long-term compounding costs to weigh carefully.
Example: $400,000 Home at 3%, 10%, and 20% Down
To illustrate the real cost differences across down payment levels, consider a $400,000 purchase at a 7.00% interest rate on a 30-year fixed loan:
| Down Payment | Down Payment Amount | Loan Amount | PMI (est.) | Monthly P&I |
|---|---|---|---|---|
| 3% | $12,000 | $388,000 | ~$194/mo | $2,581 |
| 10% | $40,000 | $360,000 | ~$150/mo | $2,395 |
| 20% | $80,000 | $320,000 | None | $2,129 |
The 20% down payment eliminates PMI and reduces the monthly P&I payment by roughly $450 compared to 3% down — but requires $68,000 more in upfront cash. The right choice depends on your savings, timeline, and how long you plan to stay in the home.
Source: HUD — Buying a Home: Down payments, assistance programs, and loan options
This definition is for informational purposes only and does not constitute financial advice.