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Module 3
Preparing for Home Ownership
Affording Your Dream
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Down Payment Requirements

How Down Payment Amounts are DeterminedYears ago, the typical new homeowner was expected to come up with 20% of the purchase price of a home as a down payment. The lender would then provide a home loan for the remaining 80%. This is referred to as 80% LTV (Loan to Value). Today there are loan programs available that require a down payment as little as 5% (95% LTV), 3% (97% LTV), and sometimes even 0% (100% LTV) of the home value. Of course, making a smaller down payment means that the home loan will be larger and the monthly home loan payment will be larger as well.

Risks of Zero Down LoansA word of caution: even though making a zero down payment might sound very attractive, it is not necessarily in your best interest. If you should have to sell the property in the first few years of the loan and the value of the home has not increased, you might find yourself “upside down” in the home loan. This means you would owe more on the loan than you would be able to pay back after selling the home. Here’s an example:

A buyer purchases a home for $180,000, using a 100% LTV program.
Two years later he sells the home for $180,000
minus the average cost to sell a home (8%) - $14,400
producing a net to the seller of $165,600
But the amount he still owes on the original loan is $176,211. Thus, the owner ends up “upside down” by almost $11,000, even though the selling price of the home was the same as the original purchase price.

We'll take a closer look at the various types of loan products in the next section.

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