Meeting the Down Payment Requirement

March 14, 2011, revised January 12, 2012

Background Reading: What Is the Down Payment?

Purchase Transactions

Establishing What the Down Payment Is: The down payment is generally viewed as the difference between the sale price and the loan amount, but that is the case only if the property appraisal comes in at or above the sales price. If the appraisal is lower, the down payment in dollars is higher.

For example, the sale price is $100,000 and the required down payment is 20%. If the appraisal is $100,000 or more, the down payment is $20,000. But if the appraisal comes in at $90,000, the down payment is $28,000, consisting of 20% of $90,000 or $18,000, plus the additional $10,000 paid to the seller.

The Down Payment Is Not the Only Required Cash: While the down payment typically is the largest component of the cash you will need to purchase a home, other settlement costs have to be paid as well. Sometimes these costs will be paid by the house seller in exchange for a higher price, and sometimes by the lender in exchange for a higher interest rate. Read Alternative Ways to Relieve Cash Strain on Home Purchasers.

The monthly payment reserve also increases cash requirements, but differs from settlement costs in that you need only to demonstrate you have it -- you don‘t pay it to anyone. The requirement can be met with bank deposits, money market funds, and other assets that may be discounted. For example, 401K funds and IRA accounts are discounted 40%.

Possible Sources of Self-Help:

Possible Sources of Help From Those Near and Dear:

Refinance Transactions

Establishing What Your Equity Is: On a refinance, the counterpart of the down payment requirement is the equity requirement – the property value less the existing loan balance as a percent of the property value. The lender will require an appraisal that establishes the value of your property. You can get estimates from automated valuation models by clicking here.

Increasing Your Equity by Paying Down the Balance: If you don’t have enough equity to qualify, or even if you qualify but want a better price and you have the cash, you can use it to pay down the loan balance. Read Is Cash-in Refinancing For You?

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