Down Payment

The portion of a home's purchase price that is paid in cash and is not part of the mortgage loan. This amount varies based on the loan type, but is determined by taking the difference of the sale price and the actual mortgage loan amount. Mortgage insurance is required when a down payment less than 20 percent is made.

Down payment (or downpayment) is a term used in the context of the purchase of expensive items such as a car and a house, whereby the payment is the initial upfront portion of the total amount due and it is usually given in cash at the time of finalizing the transaction. A loan is then required to make the full payment. The main purpose of a down payment is to ensure that the lending institution can recover the balance due on the loan in the event that the borrower defaults. In real estate, the asset is used as collateral in order to secure the loan against default. If the borrower fails to repay the loan, the lender is legally entitled to sell the asset and retain a portion of the proceeds sufficient to cover the remaining balance on the loan, including fees and interest added. A down payment in this case reduces the lender's risk to less than the value of the collateral, making it more likely that the lender will recover the full amount in the event of default. The size of the down payment thus determines the extent to which the lender is protected against the various factors that might reduce the value of the collateral, as well as lost profits between the time of the last payment and the eventual sale of the collateral. Furthermore, making a down payment demonstrates that the borrower is able to raise a certain amount of money for long-term investment, which the lender may desire as evidence that the borrower's finances are sound, and that the borrower is not borrowing beyond his or her means. If the borrower is unable to pay off the loan in its entirety, he/she forfeits the down payment amount. In the United States, down payments for home purchases typically vary between 3. 5% and 20% of the purchase price. The Federal Housing Administration, or FHA has advocated lower down payments since its inception in 1934, and currently, borrowers that qualify for an FHA loan pay only 3. 5% for a down payment. With rising home prices in the years from 2000 to 2007, lenders were willing to accept smaller or no down payment, (either through 100% Financing, seller-assisted down payment assistance, government down payment providers, or by providing a combination of an 80% 1st and 20% second mortgages), so that more individuals could purchase homes as their primary residences. This trend has been largely reversed since that time. However, in the United States, the VA or Department of Veteran's Affairs, offers 100% financing for qualifying veterans. There are also numerous state and local municipality programs that vary in down payment amounts from zero to $1000 down. For car purchases the down payment could be anywhere between 3% and 13%. Similar for purchases of comparable price. There is more risk for lenders when individuals purchase a home as an investment property. Therefore the lender may charge a higher interest rate and expect a higher down payment.