How a down payment works
Every purchase splits into two pieces: the cash you bring and the Mortgage that covers the rest. Put $40,000 down on a $400,000 home and you borrow $360,000, a loan-to-value (LTV) ratio of 90%. On day one your home equity equals the down payment, and it grows as you pay down principal or the home gains value.
Lenders price loans by that ratio. A borrower with more of their own money in the home is less likely to walk away, so a bigger down payment tends to bring easier approval and a lower rate. Below 20% down, a conventional lender usually requires private mortgage insurance, and government-backed programs charge their own insurance or fee instead.
The down payment is not the only cash a purchase needs. Closing costs such as the appraisal, title insurance and government taxes come on top, along with prepaid items: property taxes, homeowners insurance and interest until the first payment is due. Moving, furniture and early repairs follow. A plan that saves exactly the down payment is short on the day it closes.
Minimum down payments by loan type
Twenty percent is a pricing line, not a legal minimum. Conventional loans sold to Fannie Mae can reach 97% of the home’s value, so some borrowers put down as little as 3%, paying mortgage insurance until they build equity. The National Housing Act requires an FHA borrower to invest at least 3.5% of the appraised value in cash. VA-backed purchase loans for eligible service members, veterans and surviving spouses need no down payment as long as the price doesn’t exceed the appraised value.
Size matters as well as percentage. For 2026 the baseline conforming loan limit for a one-unit home is $832,750 in most of the country and up to $1,249,125 in high-cost areas. A loan above the local limit is a jumbo loan that Fannie Mae and Freddie Mac won’t buy, so each lender sets its own down payment rules. A larger down payment can keep a loan under the limit.
Saving for a down payment, and other sources of cash
Start with a target: the down payment plus closing costs and a cushion for moving and early repairs. Divide it by the months until you plan to buy for a monthly saving goal; $60,000 in four years is $1,250 a month. Money needed within a year or two usually belongs in a high-yield savings account, CDs or Treasury bills rather than stocks, which can fall just before you need them.
Most buyers assemble the money from several places, and lenders want to see where each dollar came from: large recent deposits usually need a paper trail, and gifts need a signed letter. Common sources:
- Your own savings, ideally in a dedicated account kept apart from your emergency money.
- A gift. Fannie Mae lets relatives and people with a family-like relationship fund all of the down payment on a one-unit main home, backed by a signed gift letter saying no repayment is expected.
- An IRA. Up to $10,000 over your lifetime can come out for a first home without the 10% early withdrawal penalty, though a traditional IRA withdrawal is still taxed.
- Roth IRA contributions, which you can always take back tax- and penalty-free. That money then stops growing tax-free for retirement.
- A 401(k) loan, if your plan offers one. A 401(k) withdrawal gets no first-home exception from the 10% penalty.
- Down payment assistance from a state or local housing agency, often a grant or a deferred second loan with its own rules.
How much should you put down?
Once you clear the minimum, each extra dollar down works like a guaranteed investment that earns your mortgage rate, plus whatever mortgage insurance it removes. Compare that with the alternatives for the same dollar: paying off higher-rate debt usually wins, while investing for decades may or may not beat the loan rate after tax. That weighing is the opportunity cost of a large down payment.
Liquidity is the other side. Money in the house can only come back out through a sale, a cash-out refinance or a home equity line of credit, and each depends on a lender and your home’s value at that moment. A buyer who empties savings to reach 20% can be forced onto a credit card when the water heater fails.
One workable order: keep a full emergency fund and a repair reserve after closing, keep the total payment comfortable against your income, then decide whether surplus cash goes toward 20% or stays invested. Lenders also test your debt-to-income ratio, so a larger down payment can help you qualify by shrinking the payment.
Illustrative numbers
Three down payments on a $400,000 home at 6.5% for 30 years
- Purchase price
- The contract price of the home
- Down payment %
- The share of the price paid in cash at closing
- Loan amount
- Purchase price minus the down payment, before any financed fees
- Home value
- Usually the lower of the contract price and the appraised value
Closing costs and prepaid items are paid on top of the down payment.
5% down ($20,000)$380,000 loan; $2,401.86 a month plus PMI
10% down ($40,000)$360,000 loan; $2,275.44 a month plus PMI
20% down ($80,000)$320,000 loan; $2,022.62 a month, no PMI
Extra cash for 20% instead of 5%$60,000
Monthly principal and interest saved$379.24
Moving from 5% to 20% down takes $60,000 more at closing and cuts principal and interest by $379.24 a month, before counting the PMI it removes. Most lenders also collect property tax and insurance with each payment, so the full monthly bill is higher in every case.
At a glance
Minimum down payment by loan type, 2026
| Loan type | Minimum down payment | Cost when you put down less than 20% |
|---|---|---|
| Conventional, some programs | 3% | Private mortgage insurance until the loan reaches 78%–80% of original value |
| FHA | 3.5% of appraised value | Upfront and annual FHA mortgage insurance premiums |
| VA purchase loan | 0% if the price is at or below appraised value | Usually a one-time VA funding fee; no monthly mortgage insurance |
| Jumbo, above the local conforming limit | Set by each lender | Varies by lender |
| Conventional with 20% down | 20% | No mortgage insurance required |
Put it in your plan
Down Payment in MoneyWhatIf
A property card in MoneyWhatIf can describe a future purchase: the purchase year, price, down payment, closing costs, financing and the account that funds it. The purchase lands at the start of its year, and raising the money from a taxable or retirement account can add tax. Pin the purchase year on the cash-flow chart to trace the cash required and any account withdrawals, then use What-If to compare a smaller and a larger down payment against the dashed original projection. Reports keep the down payment and closing costs out of living costs because they don’t repeat.
Common questions
Down Payment FAQs
Do you need 20% down to buy a house?
No. Twenty percent is where a conventional loan stops needing private mortgage insurance and often gets a better rate, not a legal minimum. Some conventional loans accept 3% down, FHA loans require 3.5% of the appraised value, and VA purchase loans can require nothing if the price doesn’t exceed the appraisal. Below 20% you can still buy; you pay for the lender’s extra risk through mortgage insurance or a fee.
How much is the down payment on a $400,000 house?
At the common minimums it is $12,000 for 3% down on some conventional loans, $14,000 for 3.5% on an FHA loan if the home appraises at its price, and nothing on a VA purchase loan. Ten percent is $40,000, and 20%, the level that avoids PMI on a conventional loan, is $80,000. Closing costs and prepaid taxes and insurance come on top, so the cash you need at closing is higher.
Can my down payment be a gift from family?
Usually yes. Under Fannie Mae’s rules, the entire down payment on a one-unit main home can be a gift from a relative or someone with a family-like relationship, documented by a gift letter stating no repayment is expected. The donor can’t be the builder, agent or another party to the deal. For 2026, a donor who gives one person more than $19,000 files a gift tax return, though tax is rarely owed.
Can I use my IRA or 401(k) for a down payment?
From an IRA, up to $10,000 over your lifetime can pay for a first home without the 10% early withdrawal penalty; a first-time buyer is someone who hasn’t owned a main home in the past two years. Traditional IRA money is still taxed as income, and the cash must be spent within 120 days. A 401(k) has no such exception, but many plans allow a loan. Both options shrink your retirement savings.
Is the down payment the same as closing costs?
No. The down payment reduces what you borrow; closing costs are fees for making the loan and transferring the home, such as the appraisal, title insurance and government taxes, plus prepaid property taxes, insurance and interest. Both are due at closing and appear together as cash to close. Sellers or lenders sometimes offer credits toward closing costs, but those usually come back through a higher price or a higher rate.
Should I rent longer to save a bigger down payment?
It depends on how prices, rents and your savings move while you wait. A bigger down payment cuts the loan and removes PMI, but home prices can rise faster than you save. Compare the full cost of each path, including rent paid while you save, rather than chasing 20% for its own sake. Our rent vs. buy guide walks through that comparison.