Understanding Down Payments: When and How to Prepare for Homeownership

When Should I Prepare a Down Payment for CrossCountry Mortgage? After years of saving, the moment has arrived. You've observed the signs that indicate you're ready to purchase a home, such as having a solid credit score and sufficient income to cover mortgage payments and other homeownership expenses. However, you'll need a lump sum of cash to contribute towards the home's purchase price. If you're wondering, "When do I need to have my down payment ready?" don't worry. We're here to guide you through the timeline and compare earnest money to the down payment.

When Should I Prepare a Down Payment for CrossCountry Mortgage? If you're a first-time homebuyer, it's natural to approach the homebuying process with caution. However, it's crucial to begin saving for a down payment as early as possible, as it's often the initial and most challenging step in purchasing a home. When you're ready to make an offer on a property, you won't need to come up with the entire down payment right away, but you will likely need to include an earnest money deposit. This deposit represents a portion of the down payment and is included as part of the offer you make on the house. So instead of asking, "When do I need a down payment ready?" it may be more appropriate to inquire, "When do I need to have my earnest money ready?"

In general, your earnest money is due when the purchase agreement is signed, while the remaining down payment and closing costs are due at the closing stage.

Your purchase agreement will be a comprehensive document that outlines the terms of sale. Typically, it takes approximately 30 to 45 days from the signing of the purchase agreement until the closing date of your loan. If you're just starting out or aiming to save more efficiently, there are strategies to help you save while managing your expenses. However, before planning your budget, it's essential to determine the size of the down payment you intend to make. Make sure these figures align with your financial situation.

Earnest Money vs. Down Payment: What's the Distinction? In most cases, earnest money serves as a deposit for the property you intend to purchase. This earnest money, which is later applied to your down payment or closing costs, demonstrates your commitment as a buyer. If the sale falls through, it provides protection to the seller, depending on the specific terms outlined in the purchase agreement. The amount you pay for earnest money versus the down payment is subject to negotiation based on market conditions and the house's condition. However, if the seller is dissatisfied, they have the option to reject the offer or request a higher amount. In a seller's market, where housing inventory is limited, sellers may demand an above-average amount. You can typically pay the earnest money through personal check, certified check, or wire transfer. Your real estate agent will offer further guidance on the current market conditions and how to craft a competitive offer that stands out to sellers and their listing agents.

On the other hand, the necessary funds for the down payment will vary depending on your loan type but generally range from three percent to up to 20 percent of the total purchase price. Given the substantial amount involved, don't be discouraged if you're a first-time homebuyer, as many people need to sell their current homes to accumulate sufficient funds. For qualified borrowers, there are low and zero down payment options available, including:

• FHA Loans: Minimum 3.5% down payment
• Conventional Loans (with PMI): Minimum 3% down payment
• VA Loans: 100% financing
• USDA Loan*: 100% financing
• Jumbo Loan: Minimum 15% down payment for primary residence (without PMI)

Remember, throughout the homebuying process, additional expenses may arise, so it's wise to set aside extra funds. When you've saved enough for the down payment and still have reserves remaining, it's another indicator that you're ready to proceed with your purchase.

What Happens to the Earnest Money? Your earnest money is designated for the seller, but in most cases, it will be deposited into an escrow account. This neutral third-party account will hold the funds until the transaction is finalized. The rules governing escrow accounts may vary by region, and specific details will be outlined in your purchase contract. Once the housing transaction is complete, the money will be applied towards your down payment or closing costs. As a homeowner, you may choose to establish a separate escrow account as part of your monthly mortgage payment, depending on your loan program. It's important to note that if you violate the terms of your purchase contract, you may be required to forfeit the earnest money to the seller. Therefore, it's crucial to review the contract thoroughly.

What Happens to My Down Payment if I Decide Not to Proceed? Most purchase contracts include contingencies. These contingencies allow you to back out of the purchase contract and expect a full refund of your earnest money under specific conditions. If you're uncertain about when you'll need a down payment ready or have doubts about the purchase, these contingencies provide a safety net. Common contingencies include:

• Mortgage contingency: Inability to secure financing
• Appraisal contingency: The home appraisal comes in lower than the sale price. It's important to distinguish between a home appraisal and a home inspection. While an inspector represents the buyer, an appraiser represents the lender, estimating the property's fair market value.
• Inspection contingency: The home inspection uncovers unexpected issues. For significant problems like roof damage, negotiations may be required regarding the selling price.

If you cancel the contract without having a contingency in place, you may risk forfeiting your earnest money deposit to the seller. If you're ready to initiate the homebuying process, we're here to assist you in identifying the signs that indicate you're prepared to purchase a house. Visit our blog or reach out to us today to get started.

*Some state and county restrictions may apply to maximum loan amounts.