Down Payments & Closing Costs, Demystified

Two piles of cash stand between you and the keys: the down payment and the closing costs. Most buyers overestimate the first and forget the second entirely. Let's fix both.

What a down payment actually is

Your down payment is the cash you put into the purchase; the mortgage covers the rest. Put 10% down on a $400,000 home and you borrow $360,000. The more you put down, the smaller your loan — and your monthly payment.

The 20% myth

You do not need 20% down to buy a home. Many buyers put down far less — and entire programs exist for exactly that. The 20% figure matters for one specific reason: on a conventional loan, reaching 20% equity lets you avoid mortgage insurance. It's a useful target, not a requirement.

Mortgage insurance in plain English

Mortgage insurance protects the lender — not you — against default on low-down-payment loans, and you pay the premium. On conventional loans it can typically be removed once you reach 20% equity (and it falls off automatically at 78% of the original value); FHA loans have their own mortgage insurance rules that differ. Either way: it's a monthly cost of putting less down, and it's temporary on most loan types — not a dealbreaker.

Closing costs: the forgotten pile

Beyond the down payment, expect closing costs — the fees to actually complete the purchase. They typically land somewhere around 2% to 5% of the price, though your exact number depends on your loan, location, and taxes. The usual categories:

• Lender charges: origination, underwriting, and processing fees.
• Title & escrow: title search, title insurance, and the escrow company's work.
• Recording & transfer: government fees to record the sale.
• Prepaids: homeowners insurance, property taxes, and daily interest collected upfront into escrow.
• Appraisal & inspection: paid around the time of the inspection, often before closing day.

Buyers pay most closing costs, but sellers can contribute (called seller concessions), and — importantly — assistance programs can cover them.

How assistance covers both piles

This is where the programs on this site earn their keep:

• 100% combos pair an FHA first mortgage with a second lien that can cover the down payment and/or closing costs — many buyers close with $0 of their own cash. See how the combo works →
• 1% down grants give you 2% as a true grant — no second lien to repay — which can stretch toward costs too. See the 1% down programs →
• CalHFA's stack (California) layers silent seconds for down payment plus a dedicated piece just for closing costs. See the CalHFA stack →

Bottom line: "I don't have 20%" was never the real question. The real question is which structure covers your two piles — and that's exactly what the eligibility check below figures out.

Who pays what at closing

Closing costs are negotiable in who pays them, not just in amount. The common arrangements:

• Buyer pays most — the default. Your cash-to-close includes your down payment plus your share of closing costs.
• Seller concessions — the seller agrees to contribute a portion of your closing costs as part of the deal. Limits vary by loan type, and it must be negotiated into the contract.
• Lender credits — some lenders offer a credit toward closing costs in exchange for a slightly higher rate. It reduces cash today but costs more over time — do the math both ways.
• Assistance programs — as covered above, several structures are designed specifically to absorb these costs.

In competitive markets, asking the seller for concessions can weaken your offer — which is one more reason buyers love programs that cover costs without depending on the seller.

Earnest money, explained

You'll hear this term the day you make an offer. Earnest money is a good-faith deposit — typically a small percentage of the price — that you put up with your offer to show you're serious. It's held in escrow, applied to your purchase at closing, and returned to you if you cancel within your contingency rights. You can lose it if you walk away for reasons outside your contingencies — which is exactly why the inspection, appraisal, and financing contingencies from Chapter 5 matter. Never make an earnest money deposit you couldn't afford to lose.