Understanding Down Payments and Closing Costs
A plain-language explanation of two of the most common upfront costs in a home purchase — and how to think about planning for them.
When buying a home, there are typically two categories of upfront costs to plan for: the down payment and closing costs. These are separate expenses, and understanding the difference between them is an important part of financial preparation.
What is a down payment?
The down payment is the portion of the home's purchase price that you pay upfront — it's not financed through the mortgage. For example, if you're purchasing a home for $300,000 and making a 5% down payment, you would pay $15,000 at closing and finance the remaining $285,000 through your mortgage. Down payment requirements vary by loan program. Some programs allow lower down payments than others, and the amount you put down can affect your loan terms, monthly payment, and whether mortgage insurance is required.
What are closing costs?
Closing costs are fees and expenses associated with completing the mortgage transaction. They are separate from the down payment and are paid at or near the time of closing. Closing costs typically include lender fees, third-party fees (such as appraisal, title, and settlement services), prepaid items (such as homeowner's insurance and property tax escrow), and other transaction-related costs. The total amount varies based on the loan program, purchase price, location, and other factors.
How much should I expect to pay?
Down payment requirements depend on the loan program. Some programs have lower minimum requirements than others. Closing costs vary but are often estimated as a percentage of the loan amount — the specific amount depends on your location, the lender, and the services involved. Your lender is required to provide a Loan Estimate early in the application process that outlines the estimated costs for your specific transaction.
Can closing costs be rolled into the loan?
In some cases, closing costs can be financed into the loan or covered through a seller concession (where the seller agrees to contribute toward your closing costs as part of the purchase negotiation). The rules around this vary by loan program and transaction. It's worth discussing the options with your mortgage professional.
What about gift funds?
Many loan programs allow down payment funds to come from a gift from a family member or other approved source. There are specific documentation requirements for gift funds, and the rules vary by program. If you're planning to use gift funds, mention it early in your mortgage conversation.
A note on this guide
This guide is for general educational purposes only. Down payment requirements, closing costs, and available options vary by loan program, lender, location, and individual circumstances. This content does not constitute financial, legal, or mortgage advice.
Questions about upfront costs?
Let's talk through what to expect for your specific situation — down payment requirements and closing costs vary based on the loan program and purchase price.