What is a down payment in a real estate transaction?
A down payment is the amount paid in a real estate transaction as part of a mortgage to purchase a property. The down payment is usually paid in full by the buyer’s personal funds that they already have. However, there are types of loans that allow for the buyer to have assistance in their down payment or to have a much lower down payment to none at all.
Why is a down payment needed?
The down payment is the initial investment made by the buyer into the property. In a sense, it states that the buyer is willing to put this money up front in the good faith of paying the amount to be mortgaged back over time. By doing this, the buyer has put “skin in the game” and would make the efforts needed to not lose that initial investment by making timely payments.
The down payment also builds in equity – the difference in the market value of a home versus what is owed on the home – for the property. It is in all actuality usually the first form of equity made in the purchase of a property if the house is purchased at market price. See the Real Estate Vocabulary 101: Equity blog for more details on equity.
How much of a down payment is needed to purchase a house?
The amount is usually a percentage of the purchase price. And, the percentage is based on the type of loan to be acquired along with the credit score of the purchaser. Just as a credit score affects the amount of interest to be paid on financing, the same applies here.
So, the higher your credit score the lower the down payment required. Lender’s see a high credit score as less risk for lending money – therefore do not require as much up front. The same is true in the opposite as well – the lower the credit score the higher the required down payment. A lower credit score typically means greater risk for the lender in recovering their investment in your purchase.
TAKE NOTE – the higher your down payment, the less you will need to finance through your mortgage. Thus, saving more in interest due to having less money borrowed. Make sure to always do your due diligence and search around for your options. Talk with lenders without running your credit initially to see what options may be out there for you. And, crunch those numbers! See what the best route is for your personal needs and budget overall.
For more information on down payments, see the links below.