Down payment for real estate means any money the buyer of real estate property makes available to be paid upfront to make the purchase happen. When buyers contribute higher cash towards their purchase’s downpayment, the remainder of the money they need to borrow from the lender as the mortgage will be lower; hence, their loan’s interest rate and payments will be lower. And the inverse of this is true as well. But depending on the borrower’s finances, the lender might require them to pay 0 to 50 percent of purchase prices as the down payment.
Loan To Value (LTV) Ratio
LTV Ratio is the percentage used in mortgage lending to calculate the value of the property or real estate assets being mortgaged. A high LTV ratio is perceived as a higher risk by the lender as the borrower has less investment in the purchase, and if the value falls or the property goes for foreclosure, the whole burden will be on the lender. Moreover, if the borrower applies for a loan amount near the property’s appraised value, i.e., offering less towards the down payment, the lender might rank it at a high risk of defaulting.
LTV Ratio = Mortgage Amount / Appraised Value of Property
Conventional Mortgage
In a conventional mortgage scenario, the purchaser pays upfront at least 20 percent of the property’s sales price as the down payment. The lender will regard it as a higher confidence transaction as the borrower shows higher commitment towards the purchase.
High Ratio Mortgage
When the buyer puts less than 20 percent of the property’s sales price toward the down payment, it might fall under the high ratio mortgage category. Additionally, this will require the borrower to purchase mortgage default insurance, which protects lenders even where the borrower defaults on their required mortgage payments.
Suppose the buyer purchases some property with undetermined issues. In that case, the lender might appraise the property for less than what it was listed for, thereby reducing the loan value offered to the buyer. Now buyer might have to put a large sum towards the down payment of the property to cover that gap.
