Home Buyers Usually Pay the Down Payment at Closing

Most home buyers use mortgage loans to help facilitate their purchases. And most mortgage loans require a down payment, which can range from 3% to 20% of the purchase price.

In a standard real estate transaction, the buyer will pay the down payment during the closing process. This is also when you’ll pay your closing costs, which can also add up to thousands of dollars.

This guide explains the timing of the down payment and how it fits into the broader home buying process.

A Review of Minimum Down Payments

Down payment requirements can vary depending on (A) the type of loan being used and (B) the amount of money being borrowed.

• Conventional loans, which are not insured by the government, typically require an investment of 3% or more. But some borrowers have to put down more.
• FHA home loans, which are insured through the Federal Housing Administration, require borrowers to put down at least 3.5%.
• Jumbo loans, which exceed the conforming loan limits for the county where the home is located, might require down payments up to 20% due to the higher risk.

For a typical home purchase in the United States, the minimum down payment might range from $10,000 to $20,000. So it’s a major concern for buyers, and an obstacle for some.

It’s also something you want to prepare for early on, by putting money aside. The sooner you start saving for your down payment and closing costs, the better!

You’ll Pay Your Down Payment at Closing

Home buyers usually pay the down payment on closing day, along with their closing costs.

From a buyer’s perspective, closing represents the final step in the home buying journey. It’s when you sign all finalized loan documents, pay your down payment and closing costs, and collect the keys to your new house.

Contrary to popular belief, closing doesn’t always happen in one day. Sometimes it takes place over several business days, with the buyer and seller handling their final tasks separately.

At closing, the title or escrow company managing the process will distribute all collected funds to the appropriate parties. If you made an earnest money deposit as part of your offer, those funds will be applied to your down payment at closing.

True to its name, the closing is designed to tie up all loose ends and finalize the transfer of the home from seller to buyer. It’s also when you’ll have to deliver your down payment funds.

How It Ties Into the Home Buying Process

This will make more sense if we zoom out and look at the broader home buying process, and how the down payment fits into it.

While this process can vary, it usually goes something like this:

1. You get pre-approved for a mortgage loan to find out how much you can borrow.
2. You start the house hunting process to find a suitable property that meets your needs.
3. When you find a home you want to buy, you make an offer to the seller.
4. You might also make an earnest money deposit to show the sellers you are sincere in your desire to purchase their home.
5. The seller accepts your offer and signs the purchase agreement / contract.
6. You go back to your mortgage lender for final approval, delivering the signed purchase agreement.
7. Next comes the home appraisal and mortgage underwriting process.
8. Once all of the details are finalized, you’ll attend closing and sign all of the required documents.
9. You’ll provide a cashier’s check or wire transfer to cover your closing costs and down payment (minus the earnest money deposit you already paid).
10. When all of this is done, the property deed will be recorded in the buyer’s name, officially transferring ownership of the home.

Down Payments Are Part of ‘Cash to Close’

When buying a home with a mortgage loan, you’ll eventually encounter the phrase “cash to close.” You’ll want to keep an eye out for this term, because it shows how much you’ll have to pay when you close.

Definition: “Cash to close” is a mortgage industry term that shows the total amount of money a home buyer/borrower needs to bring to the closing table in order to finalize the purchase. It’s the sum of all required funds minus any credits that have been applied.

Cash to close can include the following components:

• Down Payment: The upfront portion of the purchase price that’s not covered by the mortgage.
• Closing Costs: The fees and charges associated with mortgage processing and property transfer. They can include origination fees, escrow fees, title insurance, and prorated property taxes.
• Prepaids: Advanced payments made for certain ongoing expenses relating to the property. This can include homeowner’s insurance premium for the first year, property taxes, and prepaid interest.

Here’s an example of how cash-to-close is calculated:

• Down Payment = $70,000
• Closing Costs = $21,000
• Prepaid Expenses = $4,000
• Seller Credit = $6,000
• Cash to close ($70,000 + $21,000 + $4,000 – $6,000) = $89,000

In this example, the total cash-to-close amount for the buyer would be $89,000. That’s the total amount they need to bring to the closing table, based on the down payment, closing costs, prepaid expenses, and the credit from the seller.

Keep an Eye Out for Your Closing Disclosure

When you first apply for a home loan, you’ll receive a document known as a “Loan Estimate.” It provides important details about the loan, including the down payment and the estimated closing costs.

A few days before your scheduled closing date, you’ll receive a similar document known as a “Closing Disclosure.” (The second document is basically a finalized version of the first.)

The Closing Disclosure will also display your “cash to close” amount, as described in the previous section. This is the amount you’ll have to bring to closing to pay your down payment, prepaid items, and other costs.

The image below shows page one of the Closing Disclosure document. At the very bottom, you’ll notice a line item labeled as “Cash to Close.”

The “Cash to Close” line item includes the down payment along with the closing costs. And in the black shaded area, it tells you when you have to pay these expenses — “at closing.”

The second and third pages of this document include a detailed breakdown of all costs that are due, including the down payment funds from the home buyer.

7 Key Points to Remember

We’ve covered a lot of information here. So let’s conclude with a brief summary. Here are the seven most important points you should take away from this article.

• The down payment on a house is typically paid during the closing process.
• Down payment requirements vary based on loan types, ranging from 3% to 20% of the purchase price.
• Closing costs are additional fees paid at closing and can amount to thousands of dollars.
• The “cash to close” figure includes the down payment, closing costs, and prepaid expenses, minus any credits.
• The sooner you start saving for these expenses, the better.
• You’ll receive a Closing Disclosure document shortly before closing that outlines the exact “cash to close” amount needed.
• Earnest money deposits made during the offer process are applied toward the down payment at closing.

Disclaimer: We created this guide for a general audience, so it might not apply to every home buying scenario. If you have questions about this subject, you can refer them to your mortgage lender, real estate agent, or a HUD-approved housing counselor.