What is a down payment on a home? (2023)

What does it mean to put a down payment?

A down payment is the amount of money you contribute upfront to the purchase of your new home — your down payment and the loan from the lender make up the total sales price of the home you’re buying.

Most lenders require some minimum down payment because it establishes the homebuyer’s equity, or personal stake, in the property. From a bank or lender’s point of view, down payments are closely tied to default risk, which means the more equity a borrower establishes at the beginning of the loan, the more likely they are to pay back what was initially borrowed.

According to Jennifer Ashley, a former mortgage loan officer at ConsumerAffairs, if a borrower has a marginal total debt-to-income ratio, above-average assets can offset the weakness of the approval. Underwriters know that liquid assets can be used unexpectedly for bills or to support a borrower when there’s a temporary reduction in income.

Overall, the borrower must have sufficient liquid assets to make the upfront payment, pay the closing costs and cover other expenses at the time of purchase.

» MORE: How to get down payment assistance

How does a down payment work?

When you find a home you want to purchase, lenders don’t expect you to pay for the whole thing upfront. Instead, you will submit a loan application for the amount. Lenders require a down payment for most types of home loans because this helps mitigate the risk of taking you on as a borrower.

Your interest rate, monthly payments and closing costs will be calculated on the home price minus your down payment. For example, if you are buying a $350,000 home and put 3.5% down, you will pay $12,250 upfront. This means your loan total is now $337,750.

While lenders will set a minimum down payment depending on the loan type and proposed interest rate, you can always pay more toward your home purchase. However, it is important not to throw all of your savings at a down payment because you will need money set aside for emergencies — maybe mishaps that happen once you move into your home or general life issues, like a trip to urgent care or repairs for a car.

Private mortgage insurance

While 20% is not required for a down payment, paying a smaller down payment will require your loan to have private mortgage insurance (PMI). This is a protection for the lender and can be removed once your equity has reached 20%.

In some cases, you can use gift funds from family members for your down payment — but this must be approved.

Assets vs. gifts

Depending on your current financial situation and the mortgage program, you may be able to provide assets in lieu of a down payment — or you might be able to use gift money from family members. Assets are simply items of value a borrower can use to make payments in times of economic distress. The underwriter takes steps to verify the nature and the value of an asset provided by the borrower.

Depending on your loan type, lenders might require you to name the source of any significant irregular deposit. According to Ashley, the reason for so many layers of underwriting verification is to show you haven’t borrowed funds without a lender’s knowledge or received a loan for the down payment — this is not allowed.

» MORE: What is a gift letter for a mortgage?

What is the minimum down payment on a house?

Down payment requirements tend to vary by lender and loan type. Your credit score and other factors play a role in how much cash a lender will require you to put down to get a mortgage.

How to save for a down payment

You can set aside funds for a down payment in a matter of months or years, depending on how soon you plan to buy a home and how aggressive your savings plan is. The first step to creating a savings plan is to estimate how much you will need to cover the down payment and other expenses, like closing costs. Once you have an estimate, you can then decide the timeline for your savings goal.

Tactics such as setting up automatic savings in a high-yield account and reducing high-interest debt can help you get to your down payment goal faster. Additionally, saving windfall money, such as a bonus or tax refund, is helpful.

» MORE: How to save for a down payment

Bottom line

Before you start scheduling home tours, it is a good idea to know how much house you can afford and what your down payment will be. Remember, 20% doesn’t always have to be the goal, and homeownership could be closer than you think. Your down payment minimums will vary based on your lender, loan type and credit score.