When you’re getting ready to buy a home, one of the first things you’ll hear about is the down payment. It’s the amount of money you pay upfront before the loan kicks in—and it plays a big role in what kind of mortgage you qualify for, how much you pay each month, and how much interest you’ll pay over time.
For years, 20% was considered the standard down payment. But that’s changed. Many lenders now accept far less, and some loan programs don’t require anything down at all.
This guide breaks down what a down payment really means for you. You’ll see how different loan types affect your options, what lower down payments actually cost in the long run, and what to expect when it comes to extra fees like mortgage insurance and closing costs.
What a Down Payment Means for Homebuyers
A down payment is the upfront cash you pay toward the home’s purchase price. It reduces the amount you need to borrow—and that matters to your lender.
The more money you put down, the smaller your loan will be. A smaller loan usually means lower monthly payments, better interest rates, and less money spent over the life of the loan.
It also affects whether you qualify for the mortgage in the first place. Mortgage lenders look at down payments as a sign of financial stability. If you can put your own money into the purchase, you’re seen as a lower-risk borrower. That can help your chances of approval, especially if your credit score isn’t perfect.
The 20% Down Payment: Pros and Modern Alternatives
For decades, lenders encouraged buyers to put 20% down. The idea was that it reduced risk for both the lender and the borrower.
That rule still has benefits. A 20% down payment means you won’t have to pay for private mortgage insurance, which can save you thousands over time. It also helps you get a better interest rate and keeps your monthly payments lower.
But saving up 20%—especially with rising home prices—just isn’t realistic for most buyers anymore. That’s why most people today buy with much less down. In fact, the average down payment for first-time buyers is often closer to 6%.
Here’s how a $200,000 home purchase breaks down with different down payment amounts:
- 5% down: $10,000
- 10% down: $20,000
- 20% down: $40,000
The difference isn’t just in what you pay upfront—it also affects your loan amount, interest rate, and whether you’ll need mortgage insurance.
Mortgage Options by Down Payment Requirement
The type of loan you choose affects how much you’ll need to put down. Here’s how the most common options compare.
Conventional Loans
Conventional loans are offered by private lenders and are not backed by the government. You can get one with as little as 3% down, depending on your credit score and income.
Lenders generally look for a credit score of at least 620, though some may allow scores as low as 580 with added conditions.
If your down payment is under 20%, you’ll have to pay for private mortgage insurance. The cost varies but is usually added to your monthly payment. These loans work best for buyers with solid credit and enough savings to cover at least a small down payment.
FHA Loans
Backed by the Federal Housing Administration, FHA loans allow buyers to put down as little as 3.5%. You’ll need a credit score of at least 580 to qualify for the lowest down payment. If your credit score is lower, you may need to put down 10% or more.
FHA loans also allow higher debt-to-income ratios, which makes them more accessible for buyers with student loans or other obligations.
There is an upfront mortgage insurance fee, as well as monthly premiums. These costs stick around for the life of the loan, unless you refinance later into a conventional mortgage.
VA Loans
VA loans are available to eligible veterans, active-duty service members, and some members of the National Guard and Reserves. These loans don’t require a down payment at all.
You also won’t need private mortgage insurance, which keeps monthly costs down. Instead, there’s a one-time VA funding fee that can be paid upfront or rolled into the loan.
These loans also tend to have competitive interest rates and flexible credit score requirements, making them a top choice for those who qualify.
USDA Loans
USDA loans are backed by the U.S. Department of Agriculture and are meant to help buyers in rural and some suburban areas. Like VA loans, they require no down payment.
There are income and location limits, so not every property or borrower will qualify. These loans include a one-time guarantee fee at closing and an annual fee paid monthly—similar to mortgage insurance, but often cheaper.
For buyers outside of major cities, USDA loans can be an excellent option. Check out the eligibility map to see if any properties near you qualify for a USDA loan.
HomeReady and Other Low-Income Loan Programs
HomeReady is a mortgage option from Fannie Mae designed to help lower-income buyers. You only need a 3% down payment, and you can use income from non-borrowing household members to qualify.
Your debt-to-income ratio can go up to 50%, and the mortgage insurance costs are lower than with a standard conventional loan.
To qualify, the home must be located in an approved low-income census tract. You’ll also need to complete an online education course about buying a home.
See also: How Much House Can I Afford?
Side-by-Side Loan Comparison
Here’s a quick breakdown of the most common home loan options to help you compare them at a glance.
| Loan Type | Minimum Down Payment | Credit Score Needed | Mortgage Insurance / Fees | Income or Location Limits | Best For |
|---|---|---|---|---|---|
| Conventional | 3% | 620+ (some lenders allow lower) | PMI if under 20% down | None | Buyers with strong credit and some savings |
| FHA | 3.5% | 580+ | Upfront and monthly mortgage insurance required | None | Buyers with lower credit or higher debt |
| VA | 0% | Varies by lender | No PMI, but one-time funding fee | Must meet military service requirements | Eligible veterans and active-duty military |
| USDA | 0% | 640+ typically | Guarantee fee upfront and monthly | Income and location limits apply | Buyers in rural and select suburban areas |
| HomeReady | 3% | 620+ | Reduced mortgage insurance rates | Home must be in an approved low-income area | Low-to-moderate income buyers |
Buying a Home With Little or No Money Down
If saving up for a down payment feels impossible, there are still ways to buy a home.
Two government-backed loans—VA and USDA—require no down payment at all. You’ll need to meet specific eligibility criteria. VA loans are for qualified military borrowers. USDA loans are based on location and income limits but cover many rural and suburban areas.
In addition to these, many states, counties, and cities offer down payment assistance programs. These may include:
- Grants: Money you don’t have to repay.
- Second loans: Paid back later, often when you sell or refinance.
- Forgivable loans: Loans that disappear if you stay in the home for a set period.
Most of these programs are aimed at first-time buyers or households under a certain income level. Check with your state housing authority or a local lender to find out what’s available where you live.
See also: How to Buy a House With No Down Payment
How Small Down Payments Affect Your Costs
Putting down less than 20% can make homeownership more accessible, but it comes with trade-offs.
The biggest added cost is private mortgage insurance. Lenders require it to protect themselves in case you default. It gets rolled into your monthly mortgage bill and stays there until you build more equity.
Let’s say you buy a $200,000 home with 5% down. That leaves you with a $190,000 loan. If your PMI rate is 0.5%, that adds about $79 per month to your payment—or $950 per year.
You can remove PMI once you reach 20% equity through payments or home appreciation. Some loans remove it automatically when you hit 22% equity. Others require you to request removal in writing or refinance your loan.
Additional Costs to Prepare For
Buying a home comes with more than just a down payment. Here are the key expenses to keep in mind.
Mortgage Payment Breakdown (PITI)
Your monthly mortgage payment is made up of four parts:
- Principal: The amount you borrowed, paid down gradually.
- Interest: The lender’s charge for the loan.
- Taxes: Property taxes paid to your local government.
- Insurance: Homeowners insurance required by your lender.
Most lenders collect these all in one monthly payment and manage taxes and insurance through an escrow account.
Closing Costs
These are the one-time fees you pay at the end of the home buying process. They usually range from 3% to 5% of the purchase price. On a $250,000 home, that could mean $7,500 to $12,500 in closing costs.
Typical closing costs include:
- Loan origination fees
- Title insurance
- Appraisal and inspection fees
- Prepaid taxes and insurance
- Recording fees
In some markets, you may be able to negotiate for the seller to cover part—or all—of your closing costs. This is more common when there’s less competition for homes.
Property Taxes and Homeowners Insurance
Property taxes vary by city and state but can run anywhere from 0.5% to over 2% of your home’s value each year. Homeowners insurance costs depend on location, home size, and coverage level. Expect to pay between $300 and $1,000 per year.
Both are typically rolled into your monthly mortgage payment, so you won’t pay them separately.
Deciding How Much to Put Down
There’s no perfect down payment amount for everyone. What’s right for you depends on your savings, loan eligibility, and future plans.
Putting more down up front means smaller monthly payments, lower interest charges, and no private mortgage insurance in most cases. But draining your savings just to avoid PMI could leave you exposed to unexpected expenses after move-in.
On the flip side, a smaller down payment can get you into a home faster. That can be helpful if rents are rising or if you’re ready to stop waiting. But it comes with trade-offs like a higher loan balance, more interest over time, and mortgage insurance added to your monthly bill.
Tips to Save for a Larger Down Payment
If you’re working toward a bigger down payment, these strategies can help:
- Open a separate savings account to keep your home fund separate from daily spending
- Automate contributions from each paycheck so saving happens consistently
- Use windfalls like tax refunds, bonuses, or gifts to grow your total faster
- Avoid taking on new debt, which could lower your credit score and increase your interest rate
If you’re unsure how much to put down, talk to a lender. Ask for multiple scenarios based on your current savings and credit score. Comparing monthly costs and long-term interest can help you choose the right path forward.
Final Thoughts
You don’t need 20% down to buy a home—but the amount you put down still matters. It affects your monthly payment, mortgage insurance, interest rate, and how quickly you build equity.
The key is finding the right balance for your situation. If you’re ready to buy now with a smaller down payment, there are loan programs that can help. If you have time to save more, you may benefit from lower long-term costs.
Either way, knowing your options puts you in a stronger position. Compare loan types, crunch the numbers, and work with a lender you trust to find the best fit for your budget and goals.
Frequently Asked Questions
How can I raise my credit score before applying for a mortgage?
Focus on paying bills on time, paying down credit card balances, and limiting new credit applications. Check your credit report for errors and dispute anything inaccurate. These steps can improve your score and help you qualify for better loan terms.
Can I use gift money for my down payment?
Yes, many lenders accept gift funds—but you’ll need to document where the money came from. The donor may have to sign a gift letter stating the money doesn’t need to be repaid. Talk to your lender about their specific requirements.
What’s the difference between pre-qualification and pre-approval?
Pre-qualification is a quick estimate based on your self-reported finances. Pre-approval requires submitting documents like pay stubs and tax returns for a full review. Sellers take pre-approval more seriously when reviewing offers.
Can I use retirement savings for a down payment without penalties?
You can withdraw up to $10,000 from an IRA for a first home without early withdrawal penalties. Other accounts, like 401(k)s, may also allow loans or hardship withdrawals, but there can be taxes and long-term drawbacks. Always check the rules for your specific account.
Should I wait to buy until I can save 20% down?
Not always. Waiting may save you money on interest and mortgage insurance, but home prices and interest rates could rise in the meantime. If you find a home you can afford now with a smaller down payment, it might make sense to move forward—especially if you’re comfortable with the monthly costs.
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