There are many costs that you’ll need to consider before completing the purchase of your next home including closing costs, the deposit, and the down payment. Your down payment is the largest upfront cost you’ll have and is likely what you are focusing saving for. Since the down payment plays such an important role in any home purchase, I thought it would be valuable to go over some key information to help you better understand what you are saving for.

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What Is A Down Payment?

A down payment is part a home’s purchase price that is paid upfront in a lump sum. It cannot come from a mortgage lender as part of a loan and must come from the buyer. When qualifying for a mortgage, the bank needs to see this investment from the buyer to show that they are serious about the purchase. This reduces the risk of lending since the buyer has a financial stake in the transaction.

How Much Do You Need For A Down Payment?

The minimum down payment you need for a home depends on the purchase price. I’ve outlined the minimum requirements below depending on the purchase price of the home. If possible, it is a good idea to save for longer to cover more than the minimum requirements. A larger down payment can help you in the long run with smaller monthly payments. If you are self-employed or have poor credit history, you may be required to put down more than the minimum.

Purchase Price                        Minimum Down Payment

$500,000 or less                     5% of the purchase price

$500,000 to $999,999       5% of the first $500,000, 10% for the portion above                                                         $500,000

$1 million or more                   20% of the purchase price

Deposits & Down Payments

When buying a home, you’ll give a deposit with your offer, or you will have 24 hours to deliver one after an accepted offer. Since you’ll only have 24 hours to deliver the deposit, it is a good idea to have liquid cash set aside in a bank account that allows you to quickly transfer funds. Some online banks may take up to a week to transfer funds out, so you’ll want to review where you keep your funds and make sure they are accessible before putting in an offer.

There is no set requirement for a real estate deposit, however a typical deposit is 5% of the purchase price. A gives the seller a sense of security because the buyer now has a stake in the agreement - it assures them that the buyer is serious and protects the seller if the deal falls through. A larger deposit can also be more appealing to sellers and help get you an accepted offer. So, how does the deposit relate to your down payment? Your deposit actually counts towards your down payment and is not something you have to save separately for. Once the purchase closes, the deposit is credited towards the purchase price and forms part of the down payment.

Role In Determining Your Mortgage

The amount of your down payment will impact your mortgage but it’s not the only determining factor. Your income, debt, and credit score will also affect how much of a mortgage you qualify for and its interest rate. When calculating your mortgage, your lender will deduct the down payment from the purchase price of your home and your mortgage will cover the rest.  

Although purchases under $1,000,000 do not require a 20% down payment, anything below 20% is considered a high-ratio mortgage and requires mortgage default insurance. This protects the lender in case the borrower defaults on payments. Mortgage default insurance is most often added to your monthly mortgage payments but can also be paid upfront. Something that you will want to consider is that a smaller down payment will help you make the purchase, but could result in higher monthly payments to account for the default insurance.

You can choose to insure your mortgage if your down payment is over 20% on a purchase under $1,000,000. Your lender will be able to offer you a lower rate if you choose to go this route as your mortgage will be protected from default by insurance. Purchases over $1,000,000 are considered uninsurable mortgages since the minimum down payment is 20%. There is no option to insure mortgages in this category even if you want the insurance.

I hope you have found this informative, and it helps you in understanding down payments, and the role they play when buying a home. Whatever stage you are at in the home buying process, whether it’s the early stages of saving, or getting ready to purchase, I’m here to help!

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