All You Need to Know About Down Payment on a House

• Author: Bryan Miller
• Posted: 2024-01-26

A time comes in every adult's life when they feel the need to own a home. If you are a first-time homebuyer, it is normal to be cautious about the process. Additionally, writing a check for your down payment might be scary. If you are in such a stage, the following guide will help you confidently tackle the down payment process:

What is a Down Payment?

A down payment is an amount you pay upfront when buying a home. Often, property sellers reference the down payment as a percentage of the total selling price. For example, a 20% down payment on a $400,000 house equals $80,000. Most people cannot raise the whole home buying amount from their pocket, and they get a loan in the form of a mortgage from a lender.

How Much Down Payment Do You Need?

Most property sellers require you to have at least a 20% down payment when buying a house. The property owners and mortgage lenders find people with a lesser amount financially unstable and not serious enough to buy the home. If you don't have the required 20% down payment, your lender may ask you to pay PMI and repay it with your monthly mortgage.

However, you can still find loan options for people with a small down payment. Mortgage companies check things like your credit history, the size of your deposit, and your assets, among others, to know the amount of mortgage you qualify for.

Is It a Must to Hand Over All the Down Payment at Once?

In most cases, you will give out the down payment in two installments; the first (earnest money) is when you sign the home buying contract and the final at the closing. You must specify the earnest money you pay on the purchase agreement.

If you are purchasing an existing house, you should be ready to pay out one to two percent of the buying amount in earnest money. However, if you want to custom-build a home, you'll have to hand over a higher earnest money payment.

Where Does the Down Payment Go?

When you hand over the earnest money, it doesn't go directly to the seller. Instead, you give the money to a company that holds the cash until you complete the deal. Then the firm distributes the cash to the property seller and all the other parties involved in the house sale.

What Happens to Your Down Payment If Plans Change?

Sometimes, you may change your mind after signing the contract. Other times, the deal between you and the seller may fall apart before completing the home buying process. If you had paid a part of the down payment, you would only reclaim it depending on your state laws, the reason for the canceled deal, and the terms of the agreement. In most cases, changing your mind might make you lose your earnest money. However, you might get a refund if:
- The property seller removes the home from the market.
- You fail to get a mortgage to purchase the house.
- The home inspection brings out some significant issues you never imagined.
- You change your mind about buying the home within the allowed time frame.
Before signing the home buying contract, you should check that it clearly states the scenarios that will lead to a down payment refund if things fail to work as planned. It would be a great idea to consult your real estate agent or lender about the real estate laws in your state before signing the purchase agreement.

Can One Change their Down Payment Amount before the Closing Process is Complete?

If you have experienced challenges, such as the inability to save enough before the closing process ends, most lenders will allow you to hand over a larger down payment. However, if you want to reduce your down payment amount, you'll have to contact your lender or real estate agent to see if they'll allow you to make a smaller upfront payment.

House Buying Costs Other than the Down Payment

While saving to purchase a home, it is essential to remember that you will need more money than just the down payment for the entire process. You may need to pay some costs for mortgage application processing, contracting a home inspector, and others. In addition, you may need cash to cater to closing fees and expenses during the closing time.

Consider contacting an experienced real estate agent or using an online calculator to estimate the total amount you'll need for the whole process. That way, you'll know the amount to budget for on top of the down payment.