What Is a Down Payment in Real Estate?

A down payment is the upfront cash a buyer pays toward the purchase price of a home. It represents the buyer’s initial equity in the property and reduces the amount borrowed through a mortgage.

✅ How a Down Payment Works

A down payment is applied directly to the total purchase price. The remaining amount is financed through a mortgage.

Loan Amount = Purchase Price − Down Payment

Example:

  • Purchase price: $400,000
  • Down payment (20%): $80,000
  • Loan amount = $320,000

Down payments usually range from 3% to 20%, depending on the loan type and buyer requirements.

📊 Why Down Payments Matter

Your down payment affects nearly every aspect of your mortgage—approval, interest rates, loan options, and monthly payments.

  • Lower loan amount: Reduces your monthly mortgage payments.
  • Better interest rates: Larger down payments mean lower lender risk.
  • Less or no mortgage insurance: PMI is often required when the down payment is under 20%.
  • More equity from day one: Higher down payments build equity faster.

💡 Common Down Payment Requirements

Different loan programs have different minimum down payments:

  • Conventional loan: 3%–20%
  • FHA loan: 3.5%
  • VA loan: 0% (eligible military borrowers)
  • USDA loan: 0% (rural housing)

Buyers with stronger finances, higher credit scores, or more cash on hand may choose to put more down to secure better terms.

🏡 Down Payments & FSBO Sellers

For FSBO sellers, a buyer’s down payment percentage is an important indicator of financial strength. Larger down payments typically mean:

  • More reliable financing
  • Lower chance of appraisal issues
  • Fewer lender delays
  • Stronger offers overall

Buyers with small down payments may still be qualified but can bring added risk, especially in tight appraisal situations.

See more mortgage basics in the Mortgage Guide.