There are over 50 different terms to negotiate in Arizona’s Residential Resale Real Estate Purchase Contract. One of them, which we recently covered in another article, is how much earnest money will be held while a sale is being processed. The next term I’m going to discuss today is the down payment. Although down payments tend to be less negotiable, they are still as important, if not more important, to an offer’s chances of being accepted by a home seller.
Let’s look at why!
What is a down payment?
Wikipedia says a down payment is…
“a payment used in the context of the purchase of expensive items such as a car and a house, whereby the payment is the initial upfront portion of the total amount due and it is usually given in cash at the time of finalizing the transaction.”
More specifically, I describe a down payment as the portion of the purchase price a buyer must pay not including the amount being borrowed. This amount, therefore, varies from buyer to buyer. I’ll talk more about that below.
Why is a down payment collected?
Down payments provide peace of mind for two parties involved in the purchase of a home.
- Mortgage Lenders – Without down payments, mortgagors (home buyers who borrow money) would have very little invested in the properties they are purchasing – other than their written promises to pay back their loans. A down payment acts as that additional investment. In exchange for making larger down payments, mortgagees (mortgage lenders) may even offer discounted interest rates or more favorable loan terms.
- Home Sellers – Although they aren’t directly correlated, home sellers often associate a prospective buyer’s ability to buy a home with his or her down payment. In a way, this makes sense, too. A home buyer who has saved more money for his or her home purchase is less likely to have to withdraw an offer if he or she needs to pay for an unexpected car repair or medical bill. Because of this, buyers with larger down payments (10% – 20%) often have less trouble getting their offers accepted than buyers making lower down payments (less than 5%) do.
How much should a down payment be?
As I mentioned above, down payments vary from buyer to buyer and depend mostly on what type of loan program a buyer is applying for. Some loans, like FHA loans, require as little as 3.5% of the purchase price, while Conventional loans may require 5%, 10%, or even 20% of the purchase price. The down payment on VA loans, however, is traditionally waived.
If earnest money has already been deposited (in Arizona, it is usually deposited within 24 hours of having an accepted contract), then the earnest money will be credited back to the buyer at Close of Escrow to lower the actual amount of money the buyer needs to deposit to cover his or her down payment and closing costs. In other words, if a buyer agrees to make a $20,000 down payment and pay $6,000 in closing costs, but has already made a $4,000 earnest money deposit, then the buyer will only need to deposit an additional $22,000 in order to close escrow.
When does the buyer have to deposit the down payment?
The Arizona Purchase Contract states, “Buyer shall deliver to Escrow Company a cashier’s check, wired funds or other immediately available funds to pay any down payment…in a sufficient amount and in sufficient time to allow COE (Close of Escrow) to occur on COE Date.” Although some buyers are anxious to deliver their down payments to the escrow company as soon as possible, we usually recommend to wait to do this until after the buyer’s loan document package has been issued and the escrow company has prepared a HUD-1 Settlement Statement based on the buyer’s lender’s instructions in the loan package. This is the best way to ensure the correct amount is ordered and deposited. Before you decide what is best, though, be sure to discuss it first with your REALTOR®, escrow officer, and/or real estate attorney.
Where is the down payment held?
Here in Arizona, down payments are usually held by a neutral escrow company for the short period of time between when a buyer deposits the down payment and when the sale is recorded.
As you can see, down payments play a significant role in real estate, and should be treated as an important part of any buyer’s offer!