Down Payment

Author: Terri Ewing | Date: August 28, 2008 | Filed In: Glossary

Down Payment Defined

Down payment is the amount of money put toward the purchase price to lower the mortgage amount. If your purchase price is $100,000 and your down payment is $10,000, then your mortgage amount is $90,000. Your down payment is 10 percent of the sales price.

The less money you have toward your down payment, the more risky your mortgage. That means higher rates and more stringent underwriting guidelines. Borrowers sometimes forget the down payment amount does not include the closing costs. They have determined how much they can afford for a down payment and then find out there are many other costs associated with getting a mortgage.

Down payment funds are always documented coming from a verifiable, legitimate source. Lenders do not fund loans to borrowers who got their down payment money from unverifiable or possibly illegal means. Cash from an unverifiable source is often called “mattress money” and is not usable for a down payment or any other cost associated with closing a mortgage.

Legitimate money is always documentable. For example, if I sell my car to raise a $10,000 down payment, I have a bill of sale, the buyer’s check and/or the deposit slip from the sale when I deposited the money in my bank. The lender will need to see the paper trail…a process called “asset verification”.

Secured borrowing is a legitimate source for down payment funds (ie. a loan against a car or retirement account). But unsecured borrowing (ie. cash advances from credit cards) is not.

Gift funds are also a legitimate source for down payment funds if properly documented and the gift comes from a family member or qualified charity that requires no repayment.

Author: Terri Ewing