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How to calculate and source your mortgage down payment

May 24, 2023
4 min read

What we'll cover

How much money you need for a down payment
What to avoid when sourcing a down payment
Best ways to save for your down payment

Down payment — two words that are ubiquitous with homebuying. It’s often assumed their meaning is common knowledge. Part of the homebuyer dogma that lives in the hearts and minds of the homebuying hopeful. Something you intuitively know and understand. Right?

Okay, so maybe things aren’t that straight forward.

The truth is, buying a home is stressful enough without having to pretend that you’re going into it as an expert. Whether you’re a seasoned pro or a complete newbie, you can always learn more by asking questions , like these.

What is a down payment? And how much do you need for one?

Simply put, a down payment is a percentage of your home's purchase price that you pay up front when you open a home loan.

The amount depends on your home's purchase price and the type of loan you choose. A common homebuying myth is that you must put down 20% of a home’s price, whether you’re getting a fixed-rate or adjustable-rate mortgage. (If you’re buying a $200,000 house, that’s a down payment of $40,000.) There are other home loan options that may work better for your homebuying budget. With Ally Home , you can become a homeowner for as little as 3% down through the HomeReady mortgage program.

Use this quick and easy calculator to figure out how much down payment you can expect to pay:

What are some ways you can source a down payment?

You have several options when making a down payment:

Gifted Money – Unlike borrowed money, gifted money should not be repaid. Keep in mind, you may need to provide proof the money was gifted in the form of a letter or statement from the gift giver, and some lenders may restrict who can gift you the money. Depending on the loan, you may also be required to chip in some of your own money.
Retirement funds – First-time homebuyers may choose to tap into a Traditional IRA, up to $10,000 without being subject to the additional early distribution tax, to make a down payment. You also could consider a 401(k) loan, which unlike a 401(k) withdrawal, allows you to avoid a withdrawal penalty if you’re younger than age 59 ½ and the amount will not be subject to income tax. But there are some rules around how much you can borrow, and you’ll have to repay the loan with interest. You should always consult a tax professional before withdrawing retirement funds to determine the best choice for your situation.
Down payment assistance programs – If you’re a first-time homebuyer, you might qualify for financial support from a government agency or private organization, like a nonprofit. Payment assistance may be available via grants, forgivable loans with 0% interest, matched savings programs, deferred-payment loans with 0% interest, or low-interest loans. Amount and eligibility requirements vary, but are usually based on your income, credit history and location.

What should you avoid when sourcing a down payment?

When it comes to buying a house, some of the more typical sources of cash are off limits, including:

Personal loans – Generally speaking, personal unsecured loans cannot be used for a down payment. Because unsecured loans aren’t backed by collateral, lenders generally view down payments from them as higher risk transactions.
Borrowing money from family and/or friends – The key word here is “borrowed.” If you have to pay it back, lenders are going to see it as an additional risk.
Credit cards – Aside from most credit limits not being high enough to cover a down payment, most lenders do not permit credit card payments to be used for down payment funds.

What if you don't have enough to put 20% down?

If your down payment is less than 20% of your purchase price, you can still get a mortgage loan, but you will most likely be required to pay for private mortgage insurance (PMI). Don’t worry, it’s not as scary as it sounds. PMI protects the lender if you are unable to make your mortgage payment. When PMI is added to your loan, you will pay monthly premiums as part of your mortgage payment until you have paid off roughly 20% of the amount borrowed.

If you're saving money for a down payment, where's the best place to keep it?

If homeownership is a future you’re saving for today, consider keeping your money in a high-yield savings account, like Ally Bank’s Savings Account . In addition to earning a competitive rate, you can use our Buckets tool to divvy up your down payment funds from your other savings goals.

Down payments on the up-and-up

Understanding your down payment options shouldn’t be a hurdle when it comes to buying a home. Having the right knowledge can make you a homeowner sooner than you may have imagined.

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