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Down Payment

Down Payment

A Guide to Down Payments for a Home

A down payment is a payment that is used when purchasing an expensive item, like a house. The down payment initial upfront part of the total cost due and it is typically given in cash when the transaction is being finalized. After the down payment, a loan is required in order to make the full payment. A down payment can ensure that a lending institution will recover the total balance due on the loan if the borrower defaults.

In the context of real estate, the home is used by the lender as collateral in order to protect the loan against default. In the case where the borrower cannot repay the loan, the lender is then legally entitled to sell the home and retain the portion of the sale sufficient enough to cover the balance remaining on the loan, including the added interest and fees. In this case, a down payment makes it more likely for the lender to recover the full amount during a default by reducing the risk to less than the collateral’s value.

The amount of the down payment determines how much the lender is protected against various factors that can reduce the collateral’s value. It also protects the lender from lost profits between the last payment and the subsequent sale of the collateral.

Furthermore, a down payment demonstrates that a borrower can raise a given amount of money for a long-term investment, which a lender may desire to know as assurance that that the finances of the borrower are sound, and that a borrower is not borrowing loans beyond his means. In the case that the borrower cannot entirely pay off the loan, he then forfeits the down payment.

Most mortgage lenders request a cash down payment of 5%, 10% or 20% of the home’s sale price. Some lenders may also have zero-down mortgage programs where if the borrower can put down. If you can put down more cash than your lender requires, for example 25% to 30%, the lender will sometimes be willing to ignore some credit blemishes and approve the loan without having to verify income. If the borrower cannot come up with the entire down payment, for example less than 20%, before the loan is approved it may be necessary to obtain private mortgage insurance to protect the lender.

Places to Get Money for a Down Payment

Many home buyers do not have large cash reserves available right away to make a down payment. While there are options for those who cannot meet the typical 20% amount, it is ideal to try your best to reach in in order to lower monthly payments, and avoid having to purchase private mortgage insurance. Some ways to obtain the money include:

• Borrowing the money from a 401(k) plan

• Taking the money out of an individual retirement account (IRA)

• Using a gift for the down payment for the down payment

• Borrowing money for a down payment from either a friend or relative

• Purchasing a home with a person who is not your partner or spouse

• Sharing equity with friends, family, or an investor

• Using the equity of an existing home

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