Mortgage brokers and lenders alike encourage buyers to come in with higher down payments. Still, we get the fact that coming up with a sizable down payment is one of the most difficult tasks a home buyer has. So why do we suggest saving as big a down payment as possible? Because higher down payments are better for everyone involved.
Some first-time buyers’ mortgages have down payment requirements as little as 3%. We even know of government-backed loans that can be obtained with no money down. Meanwhile, conventional loans typically come with a 10-20% requirement. The higher the down payment, the better off everyone is.
As a buyer, you might not see the wisdom of coming in with the highest possible down payment. Allow us to offer some insight. When you come in with a higher down payment everybody wins – including you, the seller, and your lender.
How You Win
Let’s start with you. A down payment is the amount of cash you bring to the home buying transaction. Perhaps you saved all of it by yourself. Or maybe you saved some of it and your parents gifted you the rest. Either way, you win when you come in with the highest possible down payment you can. You win in two ways:
- Negotiating Power – A higher down payment increases your chances of being approved for a mortgage. This increases your negotiating power as a buyer. Remember that sellers want to sell to buyers who will not have any problem getting a mortgage.
- Less Interest – Coming in with a higher down payment ultimately means financing a smaller portion of the purchase. The less you finance, the less money you pay in total interest. You could literally save tens of thousands of dollars in the long run by coming in with a larger down payment.
These two reasons alone are sufficient motivation to save as much as you can. But let’s not forget sellers and lenders. They win with higher down payments, too.
How Sellers Win
Higher down payments benefit sellers inasmuch as they demonstrate buyer commitment. In other words, you coming in with 25% tells a seller you are more committed to the purchase than another buyer with just 5%. When all other things are equal, your higher down payment tells the seller that you are probably the better choice. The chances of your offer being accepted over one from another buyer increase commensurate with the size of your down payment.
Also consider that buyers with higher down payments generally find it easier to obtain mortgage pre-approval. Sellers like pre-approval. It allows them to accept offers knowing that the chances of a deal falling through because the buyer cannot get a mortgage are pretty slim.
How Lenders Win
Finally, lenders win with higher down payments as well. Remember that lenders must always consider risk. That is one of the reasons they require down payments. A down payment forces a buyer to put some skin in the game. It forces a buyer to assume some of the risk that comes with mortgage lending.
The higher the down payment, the more evenly the risk is spread between lender and buyer. Lenders take less risk as down payments increase. That makes them very happy. The less risk a lender needs to take, the better.
Saving up for a sizable down payment isn’t easy in the modern world. But if you can do it, coming in with 20% or more can make an enormous difference. Otherwise, there are a number of mortgage programs that could help you buy a home with considerably less down.
