Down Payments

The concept of a down payment is a simple one that can sometimes be made more complex than it truly is. While there are loans that do not require a down payment, most do request that you pay some amount as a down payment. Many of the questions and issues that arise with down payments have to do with the fact that if you pay a down payment equal to twenty percent of the entire loan, you are not required to purchase mortgage insurance.

The first misconception is confusing the amount of upfront money you contribute to the transaction with the down payment. The down payment is defined as the difference between the property value and the loan amount. This may not be the same as the amount put in because of fees and other costs that are beyond the actual cost of the property you are purchasing.

Another down payment misconception is the question about appraised value versus actual value. For example, say you buy a house that is appraised at $250,000 for $200,000. You cannot consider the $50,000 you saved as a down payment. In computing the down payment, you must use the lesser of the appraisal and selling costs. The only exception is when the lower price is recognized as being a gift to the purchaser, such as if you are buying a home from a family member.

Another down payment issue is how to treat land where you build your own house. In this case, the land can be used as a down payment. The difference between the appraisal value of your newly constructed house and the cost of building it will be considered the value of the land. For example, if you build a house at a cost of $150,000 and it is appraised at $200,000, the land will be considered worth $50,000. If you get a loan for $150,000, your down payment will be the land, worth $50,000.

No matter what type of mortgage you get, your down payment is an important part of the home buying process. Paying a larger down payment can save you money in the long run by reducing your principle and possibly even allowing you to get a lower rate.