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If you’ve been dreaming about buying a home, you might have some questions and concerns about down payments. As a first-time homebuyer, it’s reasonable to be anxious about the process. The very thought of writing out that massive check for your down payment is enough to make you sweat like a hot yoga class student. Primary Residential Mortgage can help. We’re here to demystify the down payment process so you can move forward with your dream of homeownership with confidence.


What is a Down Payment? 


The down payment is simply the funds that you pay toward the purchase of a home upfront. Typically it’s a percentage of the sales price. For example, a 20 percent down payment on a $400,000 home is about $80,000 down. Most people have to borrow the remaining balance of the purchase price from a lender in the form of a home mortgage.


How Much Do You Need for a Down Payment?


Ideally, you should have a 20 percent down payment because you’ll have a higher level of equity, and it will be easier to qualify for a loan. If you put down less than 20 percent, your mortgage lender might require you to pay private mortgage insurance (PMI). PMI is added to your monthly mortgage payment until such time you achieve 20 percent equity. Fortunately, there are loan options available if you have a smaller down payment. Each mortgage company has its own set of criteria, but the Federal Housing Authority (FHA) usually accepts lower down payments.


When is the Down Payment Due?


Most often, you make your down payment in two installments. The first payment is an “earnest money” payment when you sign the purchase and sales contract. The second payment is due at closing. Typically you should expect to pay about one to three percent of the purchase price in earnest money.

What Happens to the Earnest Money?


Your earnest money payment gets deposited directly into an escrow account, which is a neutral third party company that holds onto the money until the sale is finalized. Then, the company distributes the money to the seller and to every other party that has legal rights to the funds.


What Happens to the Earnest Money if the Sale Fails?


Sometimes, even after the buyer and seller sign a contract, the deal falls apart before closing, and you’ve still got earnest money in escrow. Your right to reclaim your earnest money and other payments depend on your local laws, the contract terms, and the reason the sale fell apart. Some common reasons you might get your earnest money back include:


  • The seller wants to take the home off the market.
  • You can’t qualify for a mortgage.
  • A professional home inspection reveals a major issue you didn’t know about.


If you’re saving to buy a home, remember that a down payment isn’t the only money you’ll need for the process. You might also need funds to process your mortgage application, hire a home inspector, and there will also be closing fees. An experienced agent at Primary Residential Mortgage will be happy to explain the process in more detail, so call us today.


Note: Opinions expressed are solely my own and do not represent the views of my employer