What Is a Down Payment?

A row of houses in a neighborhood.

If you dream of buying a home, then you’re probably aware that you’ll need to make some kind of down payment. A down payment is a percentage of the home’s purchase price that you pay upfront. For example, a 10% down payment on a $300,000 home would be $30,000. This lump sum — and additional closing costs — are paid on the closing date.

But why is the down payment so important, and how much do you need to save up?

How Down Payments Work

Minimum down payment requirements can vary depending on the loan type. While some types of mortgages have low down payment requirements, there are worthwhile benefits to putting more money down:

  • Generally, the larger your down payment, the lower your total loan costs. That’s because qualified borrowers who put more money down usually get better interest rates.
  • You’re more likely to get approved for a mortgage if you make a larger down payment.
  • Putting at least 20% down with a conventional loan lets you avoid paying for private mortgage insurance, and save some money.

Saving for a down payment can take a while. You might choose to hold off on buying a home until you can afford a 20% down payment, or put less money down and accept higher overall costs if you wish to buy sooner rather than later.

Down Payment FAQ

Here are the answers to some frequently asked questions about down payments.

Can I buy a house with no money down?

If you qualify, there are special homebuying programs requiring no down payment. For example, borrowers taking out a mortgage insured by the Department of Veterans Affairs (VA loans) or the Department of Agriculture (USDA loans) often don’t need to put any money down.

What is the difference between a deposit and a down payment?

A good faith deposit, also known as earnest money, is made before closing to show that you’re serious about buying the home. It’s not the full down payment — rather, the good faith deposit is a smaller portion of the home’s price that protects the seller while they take the property off the market and enter into a purchase agreement. This way, if the buyer backs out, then the seller’s financial losses are offset by the deposit. If the purchase is successful, then the money is applied toward the buyer’s closing costs or down payment.

A down payment, on the other hand, is a percentage of the home’s price that you pay upfront at closing to purchase the property and take out a mortgage.

Is the down payment based on purchase price or loan amount?

The down payment is based on the purchase price of the home, not the loan amount.

What are the disadvantages of a large down payment? 

Taking a bigger sum out of your savings to make a large down payment can mean having less money in reserve for emergencies or to spend on other things. It can also take much longer to save up — not ideal if you want to become a homeowner ASAP.

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