Purchase-price portion not financed by the first mortgage or other permitted purchase financing.
A down payment is the portion of a home’s purchase price not financed by the first mortgage or other permitted purchase financing.
It can come from verified personal funds, an eligible gift, approved assistance, a gift of equity, or another source allowed by the selected loan program.
The down payment helps determine the first-mortgage loan amount and the buyer’s leverage. A larger contribution generally reduces the amount borrowed and the Loan-to-Value Ratio (LTV), while a smaller contribution preserves more cash outside the transaction.
The percentage can also affect mortgage insurance, pricing, program eligibility, and reserves. A larger down payment is not automatically the best choice if it leaves the borrower without enough funds for closing costs, repairs, emergencies, or required post-closing reserves.
The source matters as much as the amount. Underwriting must confirm that the money is owned or provided by an acceptable source, available when needed, and not created by undisclosed debt.
Borrowers estimate a down payment during home shopping and preapproval. The planned amount helps set the price range, loan program, and cash target.
After application, the lender verifies the source and recalculates the structure using the purchase contract, appraisal, first mortgage, any subordinate financing, and assistance or gift documentation.
At closing, the down payment is one component of Cash to Close. Earnest money already credited to the buyer can reduce what remains to be brought, but it does not disappear from the total buyer contribution.
The basic percentage is:
For a $400,000 purchase with a $40,000 down payment:
If there is no subordinate financing, the first mortgage would be $360,000. With assistance or a second mortgage, the first-lien amount alone no longer reveals the buyer’s personal cash contribution.
| Source | Main underwriting question |
|---|---|
| Personal savings | Are the funds verified, available, and acceptably sourced? |
| Gift Funds | Are the donor, letter, source, and transfer acceptable? |
| Gift of Equity | Does the eligible seller and supported value create the contribution? |
| Down Payment Assistance | Is the assistance a grant or subordinate loan, and what terms apply? |
| Sale proceeds | Is the sale complete and is the net amount documented? |
| Borrowed funds | Is the source permitted, disclosed, and included in debt analysis? |
A program may still impose a Minimum Borrower Contribution even when gifts or assistance are otherwise allowed.
Down payment is based on the purchase transaction. LTV compares the first mortgage with the value basis allowed for underwriting, commonly involving the lower of the purchase price or appraised value on a purchase.
If a buyer agrees to pay $400,000 but the home appraises at $380,000, the planned cash contribution may need to change. The lender generally does not treat the unsupported $20,000 as added collateral value. That difference is an Appraisal Gap, not an ordinary increase in down-payment percentage for LTV purposes.
Eli plans a $40,000 down payment on a $400,000 home and expects $12,000 of closing costs. Eli has $60,000 in verified funds, so the plan appears to leave $8,000 after closing before any other adjustments.
If the final costs rise to $15,000, only $5,000 remains. Eli can ask whether a smaller down payment is permitted rather than using nearly every available dollar to preserve the original percentage.
Down payment differs from Earnest Money Deposit because earnest money is paid earlier under the purchase contract and later credited in the settlement calculation.
It differs from Cash to Close because cash to close includes the remaining down payment plus closing costs, prepaid items, credits, and prior deposits.
It differs from LTV because down payment is a contribution amount, while LTV is an underwriting leverage ratio.
It differs from Cash Reserves because down-payment funds are consumed by the purchase. Reserves remain available afterward.