Down Payment vs. Closing Costs — Why First-Time Buyers Confuse Them
They're two completely different bills, both due at closing. Mixing them up at the application stage is one of the most common ways first-time buyers under-budget for the cash they need at the table. Here's the breakdown.
Down payment
The down payment is your equity contribution to the home — money that doesn't get borrowed. If you put 5% down on a $400,000 home, you bring $20,000 to closing as down payment, and the lender provides $380,000 as the loan amount.
Down payment goes toward the home itself. It reduces your loan-to-value ratio (LTV) and your monthly mortgage.
Closing costs
Closing costs are the fees charged at closing — completely separate from the down payment. Typical closing costs include:
- Lender fees: origination, underwriting, processing.
- Title fees: title insurance (lender + owner), title search, recording.
- Escrow fees: escrow service, settlement charges.
- Appraisal: independent property valuation.
- Inspection: usually paid up-front separately, but sometimes at closing.
- Prepaid items: property taxes (often 6–12 months), homeowners insurance (1 year), and prepaid mortgage interest from closing date to month-end.
Closing costs typically run 2–4% of the loan amount. On a $380,000 loan, that's roughly $7,600–$15,200.
Putting it together
| Scenario: $400K home, 5% down, FHA | Amount |
|---|---|
| Purchase price | $400,000 |
| Down payment (5%) | $20,000 |
| Loan amount | $380,000 |
| Estimated closing costs (3% of loan) | $11,400 |
| Total cash to close | $31,400 |
Indicative numbers. Actual closing costs vary by lender, title company, and property.
Where DPA helps with each
- Most DPA programs let assistance cover both down payment and closing costs. Home Plus, Home In 5, Chenoa, Arrive, and Essex all allow this.
- Some programs allow seller credits on top of DPA. Seller credits are negotiated in the contract — the seller covers a portion of your closing costs.
- Combining DPA + seller credits is how first-time buyers reach $0 (or near-$0) cash to close.
Common mistakes
- Budgeting only for down payment. 5% down on a $400K home is $20K — but you also need ~$11K for closing, so the real number is $31K.
- Forgetting reserves. Some loan programs require 1–6 months of housing payments in reserves after closing. That's not part of cash-to-close, but it's part of the total cash required.
- Inspection paid up-front. The home inspection (~$400–$800) is usually paid when scheduled, not at closing — easy to miss in the budget.
Next step
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