Many people today live in rented houses with a dream of owning their on homes. This is a dream treasured by many people in many parts of the world. However, many of these people can not mange to raise the necessary cash upfront required to achieve this dream. Therefore, many turn to seeking a home loan to enable them own a home. Money lending institutions usually requires one to pay some amount since they do not lend loan 100%. The difference between the price of purchasing a property and that of the mortgage itself is what comprises the down payment.
Basically, a down payment is aimed at enabling the lending institution recover the loan balance due in case the person who borrowed money fail to pay. The property is used in form of a collateral in most real estate deals. This secures a loan against a default. Thus, in case the borrower fail to repay the loan, the lending institution is entitled to the right of selling the property and retaining the portion of money that can compensate the remaining loan balance. This is usually inclusive of the added interest and fees involved in the deal transactions. This ensures that the lending institution recover its full amount in case the borrower fail to pay since. This is because a down payment reduces the risk of the lending institution to a value less than the collateral value.
Therefore, the down payment size is a major determinant of the protection level of the lending institution against factors which might come up and reduce the value of the collateral. This is also the case with profit which might be lost between the last payment time and the final date of collateral sale.
In addition, when a borrower makes a down payment, it serves to demonstrate that they are at a position of raising a particular amount of money that can be used for a long term investment. This may be desired by the lending institution and also act as evidence that the borrower is sound financially. It also act to show that the borrower is not trying to live beyond their means.
In case the borrower is unable to repay the entire loan, then they forfeit the amount in the down payment. Down payment amount vary from state to state. Home loan down payment for home purchase in united states for instance vary between 3.5-20 percent.
Some people thinks that having credit score amounting to about 700 and 5 percent of home buying down payment can help them purchase a home. However, in these economic environments. Lending institutions have made credit requirements tighter for one to obtain a mortgage when buying a home.
Through FHA, one is also able to acquire an affordable mortgage. This has lower requirements for down payment. Alternatively, one can wait until they have saved some more amount of money by improving their credit score for a down payment.
This way, one stands a chance of owning a home through down payment.