When Does the Full Down Payment on a House Need to Be Made?

Originally posted on Realtor.com by Julie Ryan Evans on Oct 30, 2017

It’s fair to say that one of the things buyers are most concerned with is coming up with a down payment on a house. What’s often not clear to them is when a buyer is required to make that payment. At what point in the home-buying process are you supposed to cough up that cash?

The good news is that you don’t need to come up with the entire down payment when you make an offer and submit a purchase agreement, but you might need to include an earnest money deposit with your offer. And you will have to provide the remainder of the down payment at closing.

Earnest money deposit vs. down payment

There’s a big difference between the earnest money deposit—the cash you provide along with your offer—and your down payment, which is the amount your lender requires you to put toward the purchase of the property. The deposit tells the seller you’re a committed buyer, and it helps fund your down payment. The biggest difference between these two types of payments is that the earnest money deposit is relevant to the home seller and the down payment is relevant to your lender.

Earnest money deposit

The expected amount of an earnest money deposit varies, says Michele Lerner, author of “Homebuying: Tough Times, First Time, Any Time.” On average, you can expect to hand over 1% to 2% of the total purchase price.

“The amount of your deposit varies widely according to local customs and the price of the home you’re buying,” she says. “In some cases, a $500 deposit is sufficient; but if you’re in a competitive housing market, you should make your earnest money deposit larger. Your [real estate agent] can advise you about this in the context of your market and budget,” she says.

“The more you can put down, the stronger your offer looks to a seller,” says Sean Keene, a Realtor® with the Keene Group in Oregon. “Releasing the earnest money early to the seller [has] helped my buyers secure deals in competitive markets.”

Lerner cautions against putting too much earnest money down with your purchase agreement though. The reason: “Buyers [can] lose their deposit if there are problems with the contract,” she says.

The lowdown on the down payment on a house

The amount of money required for your down payment will vary based on your loan, but it’s typically in the 10% to 20% range.That’s a lot of cash to have sitting around. Most people need to sell their current home first to have the cash available to make the down payment.

One option to scrounge up the necessary funds is to borrow from your retirement funds and immediately replace them in full when you have access to the funds from your home sale.

“In most cases there is no penalty for using the [retirement] funds for a home purchase, but there could be a limit on how much you can borrow,” Lerner says. “Check with your retirement plan administrator or investment company to make sure you won’t pay a penalty on the transaction.”