What Is a Down Payment and How Does It Work?

A down payment is the portion of a home’s sale price you pay out of pocket. Mortgage lenders require a minimum down payment amount for most loan types. The amount you put down determines how much of the sale price you’ll finance and if you’ll have to pay mortgage insurance.

Understanding how down payments work — and how much you should aim to save — can make the process of buying a home feel less overwhelming.

What is a mortgage down payment?

When you buy a home, the down payment reflects the percentage of the purchase price you’ll pay upfront. It’s a vital part of obtaining a mortgage loan. Many types of financing require you to contribute a minimum amount toward the down payment to be eligible.

How does a down payment work?

A down payment typically consists of two parts and is closely tied to your mortgage. First is the earnest money deposit you submit with your offer, which will be held in escrow until closing. The rest of the down payment is paid at closing.

The earnest money deposit will be credited toward the purchase at closing. You’ll pay the remainder of the down payment at closing, typically via a wire transfer or cashier’s check.

How much should your down payment be?

The most important factor in deciding how much to put down is your loan requirement. Here is a look at the minimum down payment requirements for different loan types:

Loans backed by the Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA) provide up to 100% financing, so you could make a low down payment or no down payment at all. For any other loan type, you’ll need a larger down payment.

Lenders typically require at least 5% down for standard conventional mortgage loans. However, special programs let qualified low-income buyers purchase with as little as 3% down.

Loans backed by the Federal Housing Administration (FHA) require at least 3.5% down with a credit score of 580 or higher, or 10% down with a score between 500 and 579.

Once you know the minimum you must put down, you can think about how much you should put down.

Down payment pros and cons

A 20% down payment has long been considered optimal, but there are benefits and drawbacks to consider:

Pros

• Lowers debt-to-income ratio: This reduces your debt-to-income ratio, making it easier to qualify for a loan.
• Better interest rates: Investing your money in the home reduces the lender’s risk and could result in a lower interest rate. A lower interest rate results in lower monthly payments.
• Avoids private mortgage insurance (PMI): When you put down less than 20% on a conventional loan, lenders typically require PMI, which costs about 0.5% to 6% of your loan amount per year. With 20% down, you skip PMI entirely, saving hundreds or even thousands of dollars per year.
• Builds home equity faster: A bigger down payment means you start out with more ownership in your home, which can be beneficial if home values rise or you decide to sell later.

Cons

• Longer time to buy: Saving enough money for a down payment can take a considerable amount of time, delaying your homeownership, and property prices could rise in the meantime.
• Reduced savings: Paying the complete 20% down can leave you low on cash. You may not be able to afford the necessary expenses when emergencies pop up. Also, you will have reduced funds to invest in your home through repairs and renovations.
• Unable to pay down other debt: Using your savings for a large down payment could limit your ability to pay off other financial obligations, like student loans or credit cards.
• Less flexibility for other goals: Tying up your funds in home equity can make it harder to pursue other financial priorities, like investing, saving for retirement, or building an emergency fund.

The average down payment on a house was just 18% of the purchase price in 2024, according to NAR data. Many borrowers simply don’t have 20% to put down, and some who do have the money also have good reasons to put down less.

If a large house down payment wipes out your cash reserves, you’ll risk losing your home if a financial emergency leaves you unable to make your payments.

A lower down payment also leaves you with more cash you can use for major home repairs, to invest in your or your kids’ education, or even your retirement. Compounded returns on long-term investments can offset the added expense of a lower down payment.

Down payment examples

Observing how different scenarios affect your mortgage can help you decide how much to put down.

Say, for example, you’re taking out a 30-year fixed-rate mortgage on a $300,000 home. You have cash for the down payment, but aren’t sure you want all of it tied up in the home.

Here are your choices:

• Put down 20%, or $60,000, and finance $240,000
• Put down 10%, or $30,000, and finance $270,000
• Put down 5%, or $15,000, and finance $285,000

Here’s how each of these scenarios looks after five years, assuming a 7% interest rate and 0.89% private mortgage insurance (PMI):

The 5% down payment keeps $45,000 in your pocket initially, compared to a 20% down payment. But notice how the savings whittle down to $14,689 ($155,805 - $141,116) after five years when you factor in the higher mortgage payments and PMI premiums.

Factoring in the difference in equity after five years, the 5% down payment actually costs you $42,359 ($74,084 - $31,725) compared to if you’d made a 20% down payment. Moreover, the 5% down payment more than doubles the cost of building equity.

Of course, you could regret that big down payment if, a year or two after you move in, you accumulate thousands of dollars in credit card debt for a major repair or renovation you couldn’t pay for out of pocket because you’d used all your cash for the down payment. Over time, that high-interest debt could cost you as much as you’d have spent on PMI.

How to save for a down payment

Saving for a down payment is easier if you budget for the amount you need. Freddie Mac suggests multiplying your gross income by 2.5 to find out how much house you can afford. You’ll have to adjust that up or down according to the prices of homes in your area.

Next, calculate 5% of the purchase price for your minimum down payment and 2% to 5% of the loan amount for closing costs. That’s how much you need to save.

How long it’ll take to save up your down payment is wholly dependent on how much you need to save and how much you can devote to saving each month. If, for example, you need $25,000 and can save $500 per month toward your goal, you should have enough saved in 50 months, or just over four years.

Here are some tips to help you save for a down payment:

• Reduce or eliminate unnecessary expenses.
• Set up automatic transfers from your checking account to a savings account earmarked for your down payment.
• Devote “windfall” money, such as gifts, work bonuses, and tax refunds, to your down payment savings.
• Work overtime or get a side gig and save your extra earnings.

Research down payment assistance programs you might qualify for. The U.S. Department of Housing and Urban Development maintains a list of resources for prospective homebuyers.