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The act of buying a house feels like a pivotal, exciting, momentous, and even romantic endeavor. You’re taking a leap into the next phase of your life — making a home your own for the long haul or to use as an investment stepping stone.
While this may be the stuff of daydreams, the actual process of buying a house is much less sexy. It’s meticulous, calculated, and full of logistical maneuvers. However, it’s all necessary for nabbing that home of your dreams.
One of the many steps along the way that you might not fully understand is the matter of down payments. The down payment on a home gets your foot in the door, and the mortgage lets you move in. It’s the first financial move you’ll make in securing your new home purchase. And it’s a lot of money, so you’re probably wondering: When do you actually have to give the down payment to the seller?
Down payment due dates can be a bit of a gray area. There’s not a specific way to approach the down payment, nor one set amount. The size of your down payment can depend on a variety of factors, like where you’re buying, how much you have saved, and what kind of mortgage you’ll get.
With all of the variations and options out there when it comes to down payments, making a plan can instill doubt and confusion. How do you know exactly what to pay and when to pay it?
With the help of real estate experts, we’re breaking down all the details for how much you should pay and when the down payment is due.
Let’s jump in!
When is the down payment due?
Since a down payment is, as the term suggests, the amount of money you’re putting down on the purchase of your home, your mortgage lender will need to see proof of these funds fairly early on in the approval process.
But that doesn’t mean the money will leave your account just yet. To make a long story very short, your down payment is officially due at the time of closing.
We’ll get into loan specifics later, but to give you some actual numbers to make sense of everything for the moment, consider this:
While 20% has long been touted as the so-called ideal amount, it takes significant savings to afford putting this much down payment on a home — and it’s certainly not the norm for first-time buyers. According to the National Association of Realtors, the average first-time homebuyer down payment in 2021 was 6%.
This means that on a $200,000 house, new buyers were putting up at least $12,000 and using a mortgage loan to cover the remaining balance.
On a $350,000 home, a 6% down payment would look like $21,000.
This percentage on a $500,000 property would be $30,000 — and so on.
Whether we’re talking 6% or 20%, for many folks, saving several thousand dollars — or even tens of thousands — to use as a down payment can feel like an insurmountable task. While there are tips and tricks you can use to help get the ball rolling, know that there are zero down payment mortgage options available, too. (Again, more on this later!)
So the down payment is due at closing?
Yep. As we mentioned, your lender will need to see that you do actually have the money as part of your loan approval process — a current bank statement will usually suffice — but you won’t need to transfer it out until closing day.
“Down payments are always due at the time of closing,” says Jeremy Larsen, a Dallas-based real estate agent with 13 years of experience. “I’ve never seen a circumstance where it was different.”
What you will have to cough up right away is any earnest money you’ve offered the seller as part of your purchase agreement. Earnest money is an amount — usually between 1% and 3% of the purchase price — offered to the seller as a sign of good faith. It shows them you’re serious about buying their home and that you’re able to put your money where your mouth is, so to speak.
If you back out of the sales agreement and your reason for doing so isn’t covered by contingency written into the contract, the seller can keep your earnest money. Otherwise, earnest money will be held in an escrow account until closing, and the amount is then applied toward your down payment at closing.
(Larsen cautions that if you’re buying a new construction home, you will likely be expected to pay a much larger percentage of earnest money. The amount will vary from state to state and builder to builder, so talk to your agent for more insight on this one!)
Looking at that $200,000 house again, let’s say you’ve offered the seller $2,000 in earnest money and you’ll be putting a total of 10% down. The $2,000 earnest money will go toward the amount you owe at closing, so you’ll need to have another $8,000 ready to go.
The big demystifier for first-time buyers is that they’re going to get what we used to call a good faith estimate. Buyers will get an approximation of what they will owe at closing, then once they’ve secured their loan, they’re going to get a Closing Disclosure a minimum of three days prior to closing. This will require their signature and show them to the penny what they will owe at the closing table and what their monthly mortgage payment will be.”/hmlght-agent-quote]
How is the down payment actually paid?
At closing, you’ll need to be prepared with either a cashier’s check or proof of wire transfer covering the balance owed on your down payment. But don’t worry, all of this will be clearly spelled out for you ahead of time.
“The big demystifier for first-time buyers is that they’re going to get what we used to call a good faith estimate,” explains Larsen. “Buyers will get an approximation of what they will owe at closing, then once they’ve secured their loan, they’re going to get a Closing Disclosure a minimum of three days prior to closing. This will require their signature and show them to the penny what they will owe at the closing table and what their monthly mortgage payment will be.”
In other words, there won’t be any surprises at the closing table — you’ll know exactly what you’re paying and to whom.
Don’t forget about closing costs
The down payment is rarely the only dollar amount you’ll owe as a homebuyer at the closing table — there are lots of fees and expenses that go into the legal transfer of property. Some of these costs are the seller’s responsibility, and some will be yours.
Closings costs for buyers often clock in between 2% and 5% of the purchase price, and expenses beyond your down payment may include some (or all) of the following:
- Property inspections
- Property taxes
- Transfer tax
- Title review fee
- Attorney fee
- Escrow fee
- HOA transfer
- Real estate agent commission
- Title insurance
- Survey fee
- Appraisal fee
- Loan origination fee
- Underwriting fee
- Mortgage insurance
- Loan program fees
- Deed recording fee
- …and more
In short, there’s a lot going on during the process of buying a home, and you’re most likely going to have to come out of pocket for some of these costs. Fortunately, between your agent, your lender, and the closing attorney, you’ll know what to expect at each step.
Explaining down payments
As we’ve covered, when you’re ready to buy a house, you’ll usually need to show your mortgage lender proof that you have the down payment saved. How much you’ll put down depends on the specifics of your finances, and what kind of mortgage you’re getting.
Luckily, there are options for homebuyers making modest or low down payments, including assistance programs.
VA loan
Veterans have access to the Veterans Affairs (VA) loan when buying a home, a great benefit of serving the country as a current active military member, a military veteran, or as a surviving spouse of someone in the military.
Drew May, a leading real estate agent in Augusta, Georgia, where Fort Gordon is located, says there is “no better financing” than a VA loan for military buyers. A VA loan provides 100% financing with no money down — so no down payment. Making it even more desirable, in January 2020, the Department of Veterans Affairs eliminated cap limits on VA home loans.
“So, someone could literally buy a $700,000 house with no money down with a VA loan,” says May.
FHA loan
A Federal Housing Administration loan is backed by the federal government. It’s popular with first-time homebuyers because if you don’t have a high credit score or can’t afford a large down payment, you can still get approved for an FHA loan with a low down payment of 3.5%.
Unless you’re putting 20% down on a mortgage loan, mortgage insurance is required to protect the lender if the buyer defaults on their loan. So, the FHA loan comes with two insurance premium payments: an upfront premium of 1.75% of the loan amount due when the loan is granted, and an annual insurance premium ranging from 0.45% to 1.05% that’s paid with the mortgage.
USDA loan
If you’re looking for a home in a rural or suburban area and meet income requirements, a USDA loan could be an option for a zero-down-payment mortgage.
NACA loan
NACA is a non-profit, HUD-certified mortgage organization focusing on low-to-moderate-income homebuyers and lower-income areas. Its mission is to broaden homebuying access and opportunity to everyone. They offer a 30-year or 15-year fixed-rate term with no down payment or closing costs required for those who qualify.
State first-time homebuyer assistance
There are also location-based state and community assistance programs for first-time homebuyers that are worth researching. For qualifying buyers, they offer no down payment and reasonable interest rates on their mortgages.
Conventional loan
A conventional loan is a typical non-government-backed mortgage loan provided by a non-depository mortgage lender, bank, or credit union. Lenders have varying down payment requirements, but usually, the lowest possible down payment for a conventional loan is 3%. But if you have enough saved for a larger down payment, it will definitely pay off in the long run. Similar to government-backed loans, conventional lenders will charge private mortgage insurance (PMI) to offset the risk that comes with a lower down payment.
“The way you get out of private mortgage insurance is at the 20% level of down payment. So, often if somebody’s sold a house and they’re walking away with a lot of equity, they’ll roll that in and do at least a 20% down payment, if they’re move-up buyers and have the cash,” says May.
Freddie Mac Home Possible
The government-sponsored enterprise Freddie Mac offers a Home Possible Mortgage for qualified buyers with as little as a 3% down payment. It’s a type of conventional loan.
Down payment logistics
Okay, so you’ve done your research, discussed your options with your family, and consulted with your trusted real estate agent. You know what type of mortgage loan or program to apply for and what amount of down payment you can afford.
Now what? How and when do you actually make the down payment?
The down payment is typically made in two installments. The first one, which is a smaller portion of the down payment, is the earnest money — the monetary show of good faith to the seller we mentioned earlier. You’ll pay this once the offer is accepted and the home purchase contract is signed.
The remaining down payment is made at closing, at the same time that closing costs are paid. Once the payments are made, closing is completed, and the title is transferred from the seller to the buyer, the buyer officially owns the home.
Earnest money: The breakdown
Earnest money is a portion of the down payment included as part of the offer made on a home to the seller. If the contract is successful and it’s time to close, the buyer will roll the earnest money deposit into the total down payment amount. If the buyer breaks the contract, the seller can in most cases keep the earnest money.
Earnest money is usually refundable if certain contingencies aren’t met causing the termination of the contract. These include:
- Finance contingency: If a buyer cannot obtain a mortgage loan, the contract is broken and the earnest money is refunded.
- Inspection contingency: If major repairs, like an unstable foundation, leaky roof, pest infestation, or prominent mold, are uncovered during the inspection, the buyer can cancel the contract with their earnest money refunded.
- Appraisal contingency: If the appraisal value of the home comes in below the purchase price, the contract can be terminated with the earnest money refunded to the buyer.
The amount of earnest money you pay can range from $500 on the low end in a slow market where the seller isn’t getting many offers, or up to 3% of the purchase price in a fast, in-demand market. If there are multiple bids on one property, the earnest money can even get up to 10% in order to beat out the competition. There are common amounts associated with an area that vary from place to place, so an experienced real estate agent can best advise on what’s typical for the market.
The earnest money is deposited into an escrow account or a neutral third-party company that secures the money and then disperses it to the seller at closing. The money is delivered via cashier’s check or wire transfer.
The remaining down payment
The rest of the down payment will be due at the closing table. Like the earnest money deposit, the amount will be paid in the form of a cashier’s check or wire transfer. A word to the wise: proceed with caution. Wire transfer fraud happens, but as long as you’re aware and practice due diligence, it can be avoided.
To protect yourself against wire transfer fraud, take the following steps:
- Give all instructions over the phone instead of online. Call the title company directly to verify all information over the phone before the transfer is processed.
- Be aware of red flags. Last-minute changes or suspicious email correspondence can indicate fraud.
- Cover your bases on your end. Verify all information with your bank to confirm the wire destination. Once the transfer is initiated, confirm the title company received it within four to eight hours.
- If you do happen to be a victim of wire fraud, take the immediate steps to resolve it: contact your bank to recall the transfer and report the crime to your local FBI office.
Closing costs may be included in the remaining down payment wire transfer, depending on the agreement and arrangements made between the buyer and seller.
Final steps
You’re almost there. You’re so close to being a new homeowner you can taste it. The title or escrow company received the cashier’s check or wire transfer and everything is in order. They will then send all funds necessary to the seller to close the deal — the earnest money, down payment, and the mortgage amount loaned by the lender.
Then, the seller will pay their part of the negotiated closing costs out of this final sale amount, and that’s it. The deal is done!
And that’s the deal with down payments. Now that you know how much you need for each type of mortgage loan and when each part of the down payment is due, go forth and find your new home!
Header Image Source: (Mackenzie Freemire / Death to the Stock Photo)
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