What Is a Down Payment? How Much You Need to Buy a Home
By Markets & Investing DeskUpdated Nov 10, 2026
Definition
A down payment is the share of a purchase price the buyer pays upfront in cash, while a loan covers the rest. On a home, it is paid at closing and becomes your starting equity.
Key takeaways
- Conventional loans allow as little as 3% down, FHA loans need 3.5%, and VA and USDA loans can require nothing down.
- On a conventional loan with less than 20% down, lenders typically require private mortgage insurance.
- You can ask to cancel PMI at 80% of the home's original value, and it must end automatically at 78% if you are current.
- In a 5% example, putting $20,000 more down cuts the monthly payment by about $108 and saves nearly $19,000 in interest.
A down payment is the part of a purchase price that the buyer pays upfront, in cash, when a loan covers the rest. On a home, it is the share of the price you pay at closing, while the mortgage lender finances the remaining balance. It is usually expressed as a percentage of the purchase price: 20% down on a $300,000 house means $60,000 from the buyer and a $240,000 loan.
How much you need depends mainly on the loan type. Conventional mortgages backed by Fannie Mae and Freddie Mac allow as little as 3% down for eligible buyers. FHA loans require 3.5%. VA and USDA loans can require nothing down. The long-standing benchmark of 20% is a target rather than a requirement, and reported averages for first-time buyers have been far lower, around 6% of the price.
How a Down Payment Works
Three numbers connect the down payment to the loan:
- Down payment = purchase price × down payment percentage
- Loan amount = purchase price − down payment
- Loan-to-value ratio (LTV) = loan amount ÷ property value
Lenders generally base the LTV on the lower of the purchase price and the appraised value. If a home appraises below the agreed price, the buyer has to cover the gap with extra cash to keep the same loan size, or renegotiate the price.
At closing, the down payment and the lender’s loan proceeds together pay the seller. The down payment is not a fee to the lender. It stays in the property as your equity. The loan portion becomes your principal, which you repay in monthly installments with interest.
Lenders weigh the down payment alongside your credit score, income and debt-to-income ratio to decide which programs you qualify for, the rate you are offered and the fees you pay. On conventional loans, Fannie Mae and Freddie Mac apply loan-level price adjustments, which are upfront fees that vary with both credit score and down payment. A larger down payment generally lowers those fees, although your credit score still affects the result.
Minimum Down Payments by Loan Type
| Loan type | Minimum down payment | Notes |
|---|---|---|
| Conventional (Fannie Mae / Freddie Mac) | 3% | Lowest options may carry income limits. PMI applies below 20% down. |
| FHA | 3.5% | Designed for low- to moderate-income buyers. Carries its own mortgage insurance premiums. |
| VA | 0% | For eligible service members, veterans and some surviving spouses. |
| USDA | 0% | For eligible rural and suburban areas, with income limits. |
Individual lenders can set stricter requirements than the program minimum, especially for lower credit scores, investment properties or larger loans.
Why Lenders Require a Down Payment
A down payment reduces the lender’s risk in two ways. The lender has less money at stake, and the borrower starts with equity, which cushions the lender against a loss if the borrower defaults and the home is sold. Lenders also see the down payment as evidence of commitment: a borrower who has invested their own savings is less likely to walk away from the loan.
The same logic explains why lower down payments usually come with extra costs. On a conventional loan with less than 20% down, the lender typically requires private mortgage insurance. PMI protects the lender, not the borrower, if payments stop. Under the federal Homeowners Protection Act, you can ask the lender to cancel PMI once your loan balance reaches 80% of the home’s original value. The lender must end it automatically at 78%, provided you are current on payments. FHA mortgage insurance follows separate rules and does not cancel the same way.
Example of a Down Payment
Hypothetical example. A buyer is looking at a $400,000 home. The required down payment at common levels:
- 3% down: $12,000, leaving a $388,000 loan
- 3.5% down: $14,000, leaving a $386,000 loan
- 10% down: $40,000, leaving a $360,000 loan
- 20% down: $80,000, leaving a $320,000 loan, with no PMI on a conventional loan
To see the effect on borrowing costs, compare two 30-year fixed loans at an assumed 5% rate, ignoring taxes, insurance and PMI:
| $100,000 loan | $80,000 loan ($20,000 more down) | |
|---|---|---|
| Monthly principal and interest | About $537 | About $429 |
| Interest in year one (approx.) | Close to $5,000 | Close to $4,000 |
| Total interest over 30 years | About $93,256 | About $74,605 |
The extra $20,000 upfront cuts the monthly payment by roughly $108 and saves nearly $19,000 in interest over the life of the loan. Interest is charged on the outstanding balance, so a smaller starting balance reduces every payment that follows.
Down Payments on Cars
Auto lenders also look at the down payment, and 20% of a new car’s price is a common target because cars depreciate quickly, often losing a large share of their value in the first year or two. Without enough money down, the borrower can end up owing more than the car is worth, which is called being upside down or having negative equity. A 20% down payment can also make approval easier and improve the rate offered.
Dealers sometimes advertise 0% down or “no money down” deals for qualified buyers. You skip the upfront payment, but the full price is financed, and the lender may charge a higher interest rate to compensate.
Down Payment vs. Related Terms
Several terms get mixed up with the down payment:
- Deposit. In everyday use, “deposit” often means the same as down payment: an upfront payment toward a purchase. In a home purchase, it can also mean earnest money.
- Earnest money. This is a good-faith deposit made when an offer is accepted. It is held in escrow and usually credited toward the down payment or closing costs at closing. It shows the seller you are serious, but it is not the whole down payment.
- Closing costs. These are fees for the loan and the transaction, such as origination charges, title, appraisal and prepaid items. They are paid in addition to the down payment and do not reduce the loan.
- Equity. Equity is the property’s value minus what you owe. The down payment is your starting equity, which then grows as you pay down principal and as the property gains value.
Limitations of a Large Down Payment
A bigger down payment is not automatically the better choice.
- Liquidity. Money in home equity cannot be spent without selling, refinancing or borrowing against the home. Draining savings to reach 20% can leave nothing for repairs, job loss or other emergencies.
- Opportunity cost. Cash used for a down payment cannot be invested elsewhere. Whether paying down a mortgage beats investing depends on the loan rate, expected returns and your tolerance for risk.
- Waiting costs. Saving for years to reach 20% means paying rent in the meantime, and home prices can rise while you save.
- Closing costs still apply. Buyers who budget only for the down payment can come up short at closing.
Buyers who put down less can still reduce their total interest later with extra payments toward principal. If your finances improve, refinancing with more equity can also remove PMI or lower the rate, after accounting for refinancing costs.
FAQs
Can you get help with a down payment?
Yes. State and local housing finance agencies, along with some nonprofits and employers, run down payment assistance programs. These usually take the form of grants or second loans, often limited to first-time or income-qualified buyers. Many loan programs also allow gift funds from relatives. The lender will typically require a signed gift letter and documentation showing where the money came from.
The Bottom Line
Home and car buyers deciding how much cash to put down face a tradeoff. A larger down payment lowers the loan, monthly payments, total interest and often fees, and 20% avoids PMI on a conventional loan. Draining savings to reach that target can leave no cushion for emergencies or closing costs, so many buyers put down less and reduce interest later through extra principal payments or refinancing.
