Down Payment on a House: What First-Time Buyers Actually Need

The down payment is the number most first-time buyers fixate on, and also the number most widely misunderstood. Many buyers assume they need 20% before they can even begin. That misconception is keeping a lot of people renting when they could be buying.

Here is a practical breakdown of how down payments actually work, what your options are in the US, UK, Canada, Australia, and New Zealand, and the real tradeoffs between putting down more versus less.

The 20% Myth

The 20% rule comes from one specific fact: in the US, if you put down less than 20%, your lender will typically require you to pay for private mortgage insurance (PMI). PMI protects the lender — not you — against default, and adds to your monthly payment.

But 20% on a median-priced home represents a large sum of money, and waiting to save that much means years of renting while home prices potentially increase. Most first-time buyers use far less than 20%.

Minimum Down Payments by Country

United States

• Conventional loans: as low as 3% for first-time buyers through programs like Fannie Mae's HomeReady or Freddie Mac's Home Possible
• FHA loans: 3.5% minimum down with a credit score of 580 or higher
• VA loans (for eligible veterans and service members): 0% down
• USDA loans (rural/suburban areas): 0% down

With a conventional loan at less than 20% down, you will pay PMI until you reach 20% equity. With an FHA loan, mortgage insurance premium (MIP) lasts for the life of the loan if your down payment was under 10% — a meaningful long-term cost to factor in.

United Kingdom

Most lenders in the UK require a minimum of 5% deposit, though better mortgage rates (lower LTV products) become available at 10%, 15%, and 25%. First-time buyers may qualify for government-backed schemes such as the Mortgage Guarantee Scheme or shared ownership arrangements, which affect how much you need upfront.

Stamp duty for first-time buyers in England and Northern Ireland is reduced compared to subsequent buyers — the relief threshold means properties under a set value can be purchased with no stamp duty at all. Scotland has Land and Buildings Transaction Tax (LBTT) with its own first-time buyer relief, and Wales has Land Transaction Tax (LTT).

Canada

The minimum down payment in Canada depends on purchase price:

• 5% for homes priced up to $500,000
• 10% on the portion between $500,000 and $999,999
• 20% on any home priced at $1 million or above

Any purchase with less than 20% down requires CMHC mortgage default insurance (or equivalent from Sagen or Canada Guaranty), which is added to your mortgage balance. First-time buyers may access the First Home Savings Account (FHSA), which allows tax-deductible contributions toward a first home purchase, as well as the Home Buyers' Plan (HBP), which permits a RRSP withdrawal.

Australia

Most Australian lenders require a minimum 5% deposit, but with less than 20% you will pay Lenders Mortgage Insurance (LMI), which can add a substantial amount to your loan. The First Home Guarantee (formerly the First Home Loan Deposit Scheme) allows eligible first-home buyers to purchase with a 5% deposit without paying LMI, with the government guaranteeing up to 15% of the loan. State governments also offer First Home Owner Grants (FHOG) that vary by state, which can be applied toward your deposit. Stamp duty concessions or exemptions apply in most states for first-home buyers below certain purchase price thresholds.

New Zealand

The minimum is typically 10% to 20% depending on the lender's LVR (loan-to-value ratio) restrictions set by the Reserve Bank of New Zealand. First-home buyers may be eligible to withdraw KiwiSaver contributions (subject to meeting eligibility criteria) toward their deposit, and the First Home Grant provides a government contribution toward the deposit for eligible buyers of new or existing homes.

The Real Tradeoff: How Much Should You Put Down?

More down payment means:

• Lower monthly payments (you borrowed less)
• No or reduced mortgage insurance costs
• More equity from day one
• Stronger offers in competitive markets (sellers and agents view larger down payments as lower risk)

Less down payment means:

• Conserve cash for closing costs, immediate repairs, and emergency reserves
• Buy sooner, potentially before prices rise further
• Keep liquidity for other investments or expenses

Neither is universally right. The key question is whether you would be "cash poor" after closing. Buying a home with a 20% down payment but nothing left for an emergency repair or six months of mortgage payments is often a worse position than buying with 5% to 10% down and maintaining a healthy cash buffer.

A useful framework: after accounting for your down payment, closing costs (typically 2-5% of purchase price in the US), and moving expenses, do you still have at least three to six months of housing costs in savings? If not, consider whether a smaller down payment preserves a more sustainable financial position.

Down Payment Assistance Programs

Down payment assistance (DPA) programs exist at the federal, state, and local level in the US. Many are targeted specifically at first-time buyers and can be found through:

• Your state's housing finance agency (HFA)
• HUD-approved housing counselors
• Local nonprofits and community development organizations

Some programs are grants (no repayment required), some are forgivable loans (forgiven after a defined period of residency), and some are deferred loans (repaid when you sell or refinance). Income limits and purchase price caps apply in most cases.

Ask your lender or mortgage broker specifically about first-time buyer programs in your area before assuming you need to save the full amount on your own.

What First-Time Buyers Most Often Underestimate

The down payment is not the only large cash outlay at closing. Closing costs in the US typically add 2% to 5% of the purchase price on top of the down payment. This means a buyer purchasing a home with a 5% down payment actually needs closer to 7% to 9% of the purchase price in liquid savings to get to closing day.

Buyers in Australia, Canada, and the UK face similar structures — conveyancing fees, transfer taxes, inspection costs, and lender fees all accumulate before the keys are handed over.

Budget for the full cash-to-close figure, not just the down payment line, or you will reach closing day short.

How PMI and Mortgage Insurance Work in Practice

For buyers putting down less than 20% in the US, private mortgage insurance (PMI) is an important ongoing cost to understand. PMI is typically added to your monthly payment as a percentage of the loan amount — often 0.5% to 1.5% annually, though the exact rate depends on your credit score and down payment amount.

The good news is that PMI is not permanent. On conventional loans, you can request PMI cancellation once you have reached 20% equity based on the original purchase price, and lenders are legally required to automatically cancel it when you reach 22% equity. With an FHA loan, if your down payment was below 10%, MIP lasts for the life of the loan — which is a reason some buyers with strong credit prefer a conventional loan at 5% or 10% down over an FHA loan, despite FHA's lower minimum credit score requirements.

In the UK, there is no direct equivalent to PMI. However, lenders apply stricter lending criteria and higher interest rates on high loan-to-value (LTV) mortgages. A buyer borrowing at 95% LTV will typically pay a significantly higher interest rate than one borrowing at 75% LTV, which has a similar economic effect.

In Australia, Lenders Mortgage Insurance (LMI) can add tens of thousands of dollars to the cost of a loan when the deposit is below 20%. Unlike US PMI, LMI in Australia protects the lender and cannot be cancelled — once it is charged, it is a sunk cost for the buyer. This is a significant reason why many Australian first-home buyers pursue the First Home Guarantee scheme to avoid it.

Saving for Your Down Payment: Practical Approaches

A few approaches that first-time buyers use to accelerate down payment savings:

Dedicated savings account. Keeping down payment savings in a separate, high-yield savings account prevents you from spending it on other things and allows the balance to grow with interest.

Automate the contribution. Set up an automatic transfer each payday so saving happens before you can spend the money. Treating the down payment contribution like a non-negotiable bill tends to produce better results than saving "whatever is left."

Review your timeline against price growth. If home prices in your target market are rising faster than you can save, a smaller down payment now may cost less overall than waiting for 20%. This is a calculation worth running with actual numbers, not assumptions.

Gift funds. Many loan programs accept down payment gifts from family members. There are documentation requirements — your lender will require a gift letter and potentially evidence of the transfer — but gift funds are widely accepted for both conventional and FHA loans.

For a complete breakdown of what to save, how to track your down payment progress, and how to evaluate assistance programs in your area, the Homebuyer Checklist at firsthometoolkit.com includes a financial readiness module with a true "cash to close" estimator covering every cost category, not just the headline deposit amount.