Can I Pay the Down Payment Later? What to Know

A down payment represents an upfront sum a buyer pays when acquiring a significant asset, such as real estate or a vehicle. It constitutes a percentage of the total purchase price, with the remaining balance financed through a loan. This initial payment reduces the amount borrowed, which can lead to lower interest costs and monthly payments over the life of the loan.

Why Down Payments Are Required

Lenders require a down payment to mitigate their risk. This upfront financial contribution demonstrates a borrower’s commitment to the purchase and establishes immediate equity in the asset. By reducing the loan-to-value (LTV) ratio, the down payment makes the loan less risky for the lender, reducing risk in case of default. The down payment is a prerequisite for securing the loan, serving as the borrower’s initial investment rather than a deferred installment.

Options for Down Payment Flexibility

In most conventional purchase scenarios, the down payment is an upfront cash requirement due at the time of purchase or loan closing. It cannot be “paid later” as a deferred payment or a separate installment plan. The down payment represents the buyer’s initial equity contribution, which must be secured before the loan can be finalized. While the down payment cannot be delayed, strategies and loan types exist that can significantly reduce the amount of cash required from the borrower at closing.

Strategies to Reduce Upfront Down Payment Costs

Various methods and programs are available to help borrowers reduce the out-of-pocket cash needed for a down payment. One common avenue is through down payment assistance (DPA) programs, offered by government agencies, non-profits, or local housing authorities. These programs can provide grants that do not require repayment, or offer second mortgages that are either low-interest, deferred until the property is sold or refinanced, or forgivable if certain residency conditions are met over a period, five to twenty years. Eligibility for DPA programs includes criteria like being a first-time homebuyer, meeting specific income limits, and purchasing a primary residence within designated areas.

Another strategy involves using gift funds provided by eligible donors like family members or charitable organizations. Lenders require documentation for gift funds, including a signed gift letter from the donor stating that the money is a true gift with no expectation of repayment. This letter must include the donor’s name, relationship to the borrower, contact information, and the exact gift amount, along with a statement confirming the funds were not made available from anyone with an interest in the property sale. Proof of funds transfer, such as bank statements showing the donor’s withdrawal and the borrower’s deposit, is also required. Note that gift funds cannot originate from “cash on hand” or be provided by parties with a financial interest in the transaction, like the seller or real estate agent.

Seller concessions or credits can also indirectly reduce the cash a buyer needs at closing. While these funds are applied towards closing costs and not directly to the down payment, they free up the buyer’s cash that would otherwise be used for those expenses. The maximum amount a seller can contribute varies by loan type: for conventional loans, it ranges from 3% to 9% of the sales price depending on the buyer’s down payment amount, but is limited to 2% for investment properties. FHA loans allow seller contributions of up to 6% of the purchase price, while VA loans permit up to 4% of the sale price in concessions, in addition to closing costs. USDA loans also allow seller concessions up to 6% of the buyer’s loan amount.

Certain loan types offer low or no down payment options, reducing the upfront cash needed.

VA Loans

VA loans, backed by the Department of Veterans Affairs, allow eligible veterans, active-duty service members, and surviving spouses to purchase a home with no down payment requirement. While VA loans do not require monthly mortgage insurance, they include a one-time VA funding fee, which ranges from 0.5% to 3.3% of the loan amount, depending on the borrower’s service history and down payment. This fee can be financed into the loan, and it is waived for veterans receiving VA disability compensation.

USDA Loans

USDA loans, guaranteed by the U.S. Department of Agriculture, also offer 100% financing for eligible properties in designated rural areas, meaning no down payment is required. These loans include an upfront guarantee fee, 1% of the loan amount, and an annual fee of 0.35% of the remaining principal, both of which can be rolled into the loan.

FHA Loans

For borrowers who do not qualify for VA or USDA loans, FHA loans, insured by the Federal Housing Administration, offer a low down payment option, 3.5% for borrowers with a credit score of 580 or higher. FHA loans require both an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount, which can be financed, and an annual mortgage insurance premium (MIP). The annual MIP is paid for the life of the loan if the down payment is less than 10%, or for 11 years if the down payment is 10% or more.

Impact of Down Payment Size

The size of a down payment has several financial implications for a loan’s terms and overall cost. A larger down payment directly reduces the loan amount, which in turn leads to lower monthly mortgage payments. A substantial down payment can also result in a lower interest rate, as it signifies less risk for the lender. Furthermore, for conventional loans, a down payment of 20% or more eliminates the need for Private Mortgage Insurance (PMI), a monthly fee that protects the lender.

Conversely, a smaller down payment increases the loan amount, resulting in higher monthly payments and potentially higher interest rates. For conventional loans with less than 20% down, PMI becomes a mandatory additional cost, calculated as a percentage of the loan amount and added to monthly payments. Similarly, government-backed loans like FHA, VA, and USDA loans, despite offering low or no down payment options, include their own forms of insurance or guarantee fees that add to the overall cost, some of which may be financed into the loan.