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Down payment strategies

How much do you actually need, where can it come from, and when does saving more vs buying sooner make sense?

Last updated April 2026

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The single most-asked first-time-buyer question is some version of: “Do I really need 20% down?” The short answer is no. The longer answer depends on your situation, your timeline, and the cost structure of each path.

Minimums by program

You don’t need 20% down. Here are the actual floors:

  • VA: 0% down for eligible veterans
  • USDA: 0% down in eligible rural areas
  • FHA: 3.5% down with 580+ FICO
  • Conventional 97 / HomeReady / Home Possible: 3% down for first-time buyers
  • Standard conventional: 5% down for repeat buyers
  • Jumbo (above conforming limit): typically 10-20% down

See the FHA vs Conventional vs VA guide for program tradeoffs.

What changes if you put more down

Each additional 1% you put down does three things:

  1. Reduces your loan size → reduces monthly P&I and lifetime interest
  2. Reduces your LTV → may drop you into a lower LLPA band (better rate) or out of the PMI requirement entirely (≥20% down)
  3. Frees more cash for emergency reserves and other goals → if it doesn’t

The third point is the catch. The opportunity cost of every extra dollar of down payment is what that dollar could have done elsewhere (emergency fund, 401(k) match, paying off higher-interest debt). The first $20-50k of down payment is usually high-leverage; beyond that the returns diminish.

When 20% down is worth it

  • PMI rates are rough for your profile. If you’re a 640 FICO borrower with 5% down, PMI may run 1.0%+/yr. Reaching 20% to drop it is meaningful.
  • You’re in a strong-LLPA band. Going from 95% to 80% LTV can save 0.5%+ in LLPA-driven rate.
  • You have a fully-funded emergency reserve already (3-6 months of expenses in liquid savings).
  • You’re maxing your tax-advantaged retirement accounts.

When less than 20% is the right call

  • You’d deplete your emergency fund. Buying with 5% down and $30k in savings beats buying with 20% down and $0 in savings.
  • You’d miss your employer 401(k) match. That’s a 100% return that beats anything mortgage-related.
  • The home is appreciating fast. Waiting 2 years to save another 10% can cost more in price appreciation than you save in PMI.
  • PMI is cheap for you. 760+ FICO at 90% LTV pays ~0.30%/yr PMI, cancellable in a few years. Often beats 18 months of saving + lost appreciation.

Where the down payment can come from

1. Savings (the boring path)

The most common source. Optimize the savings vehicle:

  • High-yield savings account (HYSA) at 4-5% APY for funds you’ll need within 1-2 years. Don’t put down-payment money in stocks if you’ll need it that soon.
  • CD ladder for slightly better rates with known timing.
  • Treasury bills for short-term, federal-only-tax savings.

The math on saving aggressively for 1-3 years can be powerful. Saving $2,500/mo at 4.5% HYSA for 24 months = ~$63k.

2. Gift funds

Family (or in some loan programs, employers, charities, friends with documented interest) can gift you down-payment funds. The rules vary by program — see the Gift Funds Wizard for what your specific scenario allows and what documentation you’ll need.

Key things to know:

  • Conventional now allows 100% gift on primary AND second homes (the old 5% borrower-contribution rule was removed in 2021)
  • FHA accepts cash gifts only if the donor sources them through a bank account (no cash on hand)
  • VA: any non-interested party can gift
  • IRS gift tax: donor can give up to $19k/donee/year (2026) without filing Form 709. Above that, donor files paperwork but doesn’t pay tax until exceeding the lifetime exemption ($13M+).

3. Down payment assistance (DPA)

State, county, and city programs can provide grants, forgivable loans, or below-market second mortgages for down payment + closing costs. Often combined with FHA loans. Filter by:

  • First-time-buyer status (most are FTHB-only)
  • Income limits (typically 80-120% of area median income)
  • Profession (teachers, first responders, healthcare workers often have dedicated programs)
  • Property location (some are census-tract-targeted)

Search “[your state] down payment assistance” + check HUD’s state program directory. We don’t maintain a comprehensive list, but it’s often the highest-leverage thing a first-time buyer can find.

4. Retirement account withdrawals

Generally a last resort, but options exist:

  • Roth IRA contributions (not earnings) can be withdrawn at any time, tax- and penalty-free
  • Roth IRA earnings: $10k lifetime exception for first-time buyers if account is 5+ years old
  • Traditional IRA: $10k lifetime first-time-buyer exception from the 10% penalty (still owe income tax on the withdrawal)
  • 401(k) loan: borrow up to $50k or 50% of vested balance, repay yourself with interest. If you leave the job, the loan often becomes due in 60 days.

The 401(k) loan is the least-bad of these because you pay yourself back. The IRA withdrawals trigger taxable income (traditional) or use up tax-advantaged space (Roth).

5. Selling investments

If you’ve been investing in a taxable brokerage account, selling to fund a down payment triggers capital gains tax. Two notes:

  • Long-term holdings (>1 yr) are taxed at 0/15/20% federal — usually less painful than people fear
  • Tax-loss harvesting: if you have any losing positions, sell them in the same year to offset gains

”Should I save another year or buy now?”

The honest answer requires running both scenarios. Use the Affordability calculator to see what your savings buys you at each level, and use the Rent vs Buy calculator to factor in the opportunity cost of waiting.

A useful framing: if you expect home prices to rise 4% next year and saving aggressively for 12 more months adds 5% to your down payment, those roughly cancel out. If prices are flat and your down payment materially changes your loan terms (drops PMI, drops LLPA band), waiting wins. If prices are climbing fast, buying now usually wins.

Down payment savings goal

A simple way to plan: decide your target down payment amount and timeline, then back into the monthly savings rate.

Future value formula for monthly savings:

FV = P × [((1 + r/12)^n − 1) / (r/12)]

where P is monthly contribution, r is annual return (use HYSA rate ~4-5% for short-term, 7% if you can wait 5+ years and accept stock-market risk), n is months.

To save $80k in 36 months at 4.5% HYSA: $80,000 × (0.045/12) / ((1 + 0.045/12)^36 − 1) ≈ $2,080/mo.

Common down-payment mistakes

  • Putting all your savings into the down payment, leaving zero emergency fund. Closing day with $0 in checking is a real way to immediately fall behind on the mortgage.
  • Skipping employer 401(k) match to “save for the house”. The match is free money and beats any home-related decision.
  • Going to 20% down by tapping retirement. The taxes + lost growth on the retirement money usually exceed the PMI savings.
  • Borrowing the down payment via personal loan or credit card. Lenders see this on your credit pull during underwriting and the loan dies.
  • Not asking about DPA programs. They exist almost everywhere and many buyers never apply.
  • Confusing “down payment” with “cash to close”. You also need closing costs, which are 2-5% of price on top of the down payment.