Down payment
Encyclopedia
Down payment is a payment 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.
, 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.
Čar
Čar is a village in the municipality of Bujanovac, Serbia. According to the 2002 census, the town has a population of 296 people.-References:...
and a house
House
A house is a building or structure that has the ability to be occupied for dwelling by human beings or other creatures. The term house includes many kinds of different dwellings ranging from rudimentary huts of nomadic tribes to free standing individual structures...
, 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
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
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
Default (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
. In real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
, the asset is used as collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
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.
Amounts
In the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, 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
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
), 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.