By Taylor Crawford · First-Time Buyers
Last Updated: August 2026
The Short Answer
One of the biggest myths about buying a home is that you need a 20% down payment.
The truth is, many buyers in the Birmingham area purchase homes with far less than 20% down. Depending on the loan program and your financial situation, you may be able to buy with as little as 0% to 5% down.
However, your down payment is only one piece of the puzzle. When planning to buy a home, you'll also need to consider closing costs, earnest money, prepaid taxes and insurance, and other cash-to-close expenses. The good news is that there are several ways to reduce those upfront costs, including seller concessions, gift funds, and down payment assistance programs.
Let's break down what you should actually expect.
What Costs Do You Pay When Buying a Home?
Most buyers will encounter these five categories of expenses:
- Down payment
- Earnest money
- Closing costs
- Prepaid taxes and insurance
- Cash reserves after closing (sometimes required)
Understanding each one will help you prepare without unnecessary surprises.
1. Down Payment
Your down payment is the portion of the home's purchase price that you pay upfront.
Many people believe you must put down 20%, but that's simply not true.
Here are some common examples:
Loan Program - Typical Minimum Down Payment*
- Conventional - 3% (qualified first-time buyers)
- FHA - 3.5%
- VA - 0% (eligible veterans and service members)
- USDA - 0% (eligible rural properties)
*Actual eligibility depends on the loan program and your financial qualifications. For example:
A $350,000 home with 5% down would require a $17,500 down payment.
But that doesn't necessarily mean you need to bring all of that money yourself.
2. What Is Earnest Money?
Earnest money is a deposit you make after your offer is accepted.
It tells the seller you're serious about purchasing the home.
In our market, the amount varies depending on the price of the home and local customs.
The important thing to know is this:
Earnest money is not an extra fee.
In most transactions, it's credited toward your total cash needed at closing.
3. What Are Closing Costs?
Closing costs include many of the expenses required to complete your loan and transfer ownership of the property.
These can include:
- Appraisal
- Credit report
- Title insurance
- Closing attorney or settlement fees
- Recording fees
- Lender fees
- Government taxes and recording charges
Every transaction is different, so the exact amount depends on your loan program, purchase price, and other factors.
4. What Are Prepaid Costs?
Prepaid costs are different from closing costs.
These are expenses you're paying in advance because you'll own the home after closing.
They often include:
- Homeowners insurance
- Property taxes
- Initial escrow deposits (if applicable)
- Prepaid mortgage interest
These aren't "extra fees" charged by the lender. They're simply costs associated with owning your new home.
5. Can the Seller Help Pay My Closing Costs?
Yes.
In many transactions, buyers negotiate seller concessions as part of the purchase agreement.
Those funds may be used to help cover eligible closing costs and prepaid expenses, depending on your loan program and the terms of the contract.
This is one reason it's important to look beyond just the purchase price when evaluating an offer.
6. Can Someone Gift Me My Down Payment?
Often, yes.
Many loan programs allow eligible family members—and in some cases other approved donors—to provide gift funds for part or all of your down payment and closing costs.
If you're planning to use gift funds, let your lender know early so the proper documentation can be collected.
7. What About Down Payment Assistance?
Many first-time buyers are surprised to learn they may qualify for programs designed to help with upfront costs.
Depending on your situation, these programs may help with:
- Down payment
- Closing costs
- Both
Eligibility depends on factors such as income, credit profile, loan program, and the specific assistance program.
Example: Buying a $350,000 Home
Let's use a simple example.
Purchase Price: $350,000
Suppose you're using a conventional loan with 5% down.
Your costs might include:
- Down payment
- Closing costs
- Prepaid taxes and insurance
Now suppose the seller agrees to contribute toward your closing costs.
Your required cash at closing could be significantly lower than you expected. Every buyer's situation is different, which is why it's important to look at the entire picture instead of focusing only on the down payment.
How Much Money Should You Save?
There's no one-size-fits-all answer.
Some buyers qualify with very little money out of pocket.
Others choose to bring more money to reduce their monthly payment.
The right amount depends on your goals, the loan program, and the home you're purchasing.
One of the biggest mistakes buyers make is assuming they can't afford a home without first talking to a lender.
Sometimes the numbers are better than they expected.
Frequently Asked Questions
Do I need 20% down to buy a house?
No. Many buyers purchase with much less than 20% down, depending on the loan program and their qualifications.
Is earnest money separate from my down payment?
Usually no. Earnest money is generally credited toward the amount you need to bring to closing.
Can the seller pay my closing costs?
In many cases, yes. Seller concessions are common and may help reduce your out-of-pocket expenses, subject to loan program guidelines and the purchase agreement.
Are closing costs included in my down payment?
No. They are separate expenses.
Can I use gift money?
Many loan programs allow eligible gift funds, provided documentation requirements are met.
How do I know how much money I'll actually need?
The best way is to have a lender review your specific situation and provide a personalized estimate based on your goals, loan options, and the home you're considering.
Final Thoughts
Buying a home involves more than just saving for a down payment. Understanding the different pieces of your cash-to-close can help you plan with confidence and avoid unnecessary surprises.
If you're thinking about buying a home in the Birmingham area, it's worth having a conversation before assuming you need a certain amount saved. Every situation is different, and there may be options you haven't considered.
About Mortgage With TLC
At Mortgage With TLC, my goal is to help buyers understand their options so they can make informed decisions with confidence. Whether you're purchasing your first home or your fifth, I'm happy to walk through the numbers and explain what to expect—without pressure or obligation.