Down payment

Key Takeaways

• The down payment is the portion of the purchase price a buyer pays from their own funds instead of borrowing it.
• Purchase price minus down payment equals the loan amount, which is what sets the loan-to-value ratio.
• Earnest money is part of the down payment rather than an extra charge, because it is credited to the buyer at closing.
• Washington brokers must deposit client funds in the firm's trust account by the next banking day after receipt unless the purchase and sale agreement provides for deferred deposit (RCW 18.85.285).

What It Means

A down payment is the slice of the purchase price a buyer covers with their own money rather than with borrowed money. Subtract it from the price and what is left is the loan. On a $610,000 house, $61,000 down leaves a $549,000 loan, while $122,000 down leaves $488,000.

That number drives the Loan To Value Ratio, the loan amount stated as a percentage of the property's value. Ten percent down produces a 90 percent ratio; twenty percent down produces 80 percent. Lenders price risk off that ratio, so a larger down payment usually earns better loan terms and, on a conventional loan, is what carries a borrower past the threshold where Private Mortgage Insurance Pmi is required.

Two things get confused with the down payment and should not be. Earnest Money is a deposit made when the offer is accepted, and it becomes part of the down payment at closing rather than an addition to it. Closing costs are separate charges for the loan, title, escrow and prepaid items, and the buyer owes those on top. Cash to close is the sum of all of it, and that total is the figure a buyer has to bring.

How It Works in Washington

The minimum down payment on a purchase comes from the loan program the buyer chooses. What Washington regulates tightly is the buyer's money before closing. Under RCW 18.85.285, all client funds held pending closing must be kept separate and physically segregated from the firm's own funds, and brokers must deposit those funds in the firm's trust bank account the next banking day following receipt unless the purchase and sale agreement provides for deferred deposit or delivery. WAC 308-124E-110 then locks the money down: no disbursement may be made from the real estate trust bank account in advance of closing, to any person or for any reason, without a written release from both the purchaser and the seller. The earnest money that will become part of the down payment is protected by those two rules from the day the check is written.

The size of the down payment carries more weight in Washington than in a state that allows lenders to chase borrowers after foreclosure. The loan is secured by a Deed Of Trust under RCW 61.24.020, and RCW 61.24.100 provides that a deficiency judgment shall not be obtained on obligations secured by a deed of trust against any borrower, grantor or guarantor after a trustee's sale, with limited exceptions for commercial loans that do not reach a property the borrower occupies as a principal residence. The buyer's own money in the deal is the cushion standing between a falling market and the lender's loss, which is a large part of why lenders price it so carefully.

Example

Dana is buying in Everett at $610,000. She writes a $12,000 earnest money check with her offer, and the firm deposits it in its pooled trust account the next banking day. She plans to put 10 percent down.

Ten percent of $610,000 is $61,000, so her loan is $549,000 and her loan-to-value ratio is 90 percent. Because the $12,000 earnest money is credited to her at closing, she wires $49,000 more to complete the down payment, and her closing costs are billed on top of that. Her lender requires private mortgage insurance above 80 percent, so it applies. If Dana can find another $61,000 and put 20 percent down instead, her loan falls to $488,000, the ratio drops to 80 percent, and the mortgage insurance requirement goes away. That extra $61,000 buys her no more house. It buys a smaller loan and better terms on it, and our walkthrough of a first Washington closing shows how the pieces appear on the settlement statement.

Common Mistakes and Exam Traps

• The down payment is subtracted from the purchase price to find the loan amount, so a larger down payment means a smaller loan and not a lower price.
• Earnest money is not on top of the down payment. It is credited to the buyer at closing and reduces the cash still owed that day.
• Closing costs are separate from the down payment. A question asking for cash to close wants both figures added together.
• A down payment is not the same as equity. It is the equity a buyer starts with, and equity changes afterward as the balance falls and value moves.