How much do I need for a down payment?

This is often one of the first questions my serious clients will ask. While there are many variables affecting the answer, the decision is ultimately up to the buyer and their selected lender/loan. The answer may be ZERO!

First, let’s look at what a down payment is and what purpose it serves. Do you remember how stores used to sell products on layaway? Basically, you would give them a down payment on the purchase price of the item and then continue to make payments at intervals until you finally paid off the purchase price and could take the product home.

A house is financed in a similar fashion, except that you get to use the product prior to it being paid off. The down payment is an amount of money you put down upfront towards the purchase price. The amount of money you put down at the start reduces your interval (usually bi-weekly or monthly) payments.

A down payment shows the lender you are invested in completing the purchase. In other words, you have something to lose and so you are less likely to stop making payments and forfeit the money you’ve already given them. The higher the down payment, typically the less riskier the loan is. This can mean lower interest rates or more favorable terms for your loan.

Traditionally, a 20% down payment was typically required by most lenders. However, with the cost of living increasing faster than income, “creative” financing has surfaced in an attempt to help people buy homes despite economic changes. There are now ways to get into a house with NO down payment, multiple mortgages, interest only loans, etc.

Remember, there will be trade-offs for each option and your lender can discuss those options with you. For example, you may end up paying a monthly insurance fee with a smaller down payment or you may end up having a large lump sum “balloon” payment come due in a few years. It’s important to research the types of loans available, decide what is right for you, and discussing those options with the lender you choose.

Don’t forget that you’ll still need funding for closing costs at the time of purchase. I’ll discuss closing costs in another post. There is also a new trend in fundraising for down payments called “real estate crowdfunding” – a quick web search will give you general idea on this trend until I cover it in a future post!