Can You Change Down Payment Amount Before Closing?

A down payment represents a portion of a home’s purchase price that a buyer pays upfront, reducing the amount of money borrowed through a mortgage. Financial situations can evolve during the home buying journey, leading many to consider adjusting their initial down payment amount. This article explores altering a down payment before closing on a home and the associated considerations.

Factors Influencing Down Payment Changes

The ability to modify a down payment depends on several factors, including the type of loan secured and the loan-to-value (LTV) ratio. Different mortgage products, such as Conventional, FHA, VA, and USDA loans, each have specific minimum down payment requirements. Conventional loans might allow down payments as low as 3%, while FHA loans require a minimum of 3.5% down. VA and USDA loans often permit no down payment at all, offering considerable flexibility.

The loan-to-value (LTV) ratio, calculated by dividing the loan amount by the home’s appraised value, is directly impacted by the down payment. A higher down payment results in a lower LTV, indicating less risk to lenders. Conversely, decreasing the down payment increases the LTV, potentially triggering a re-evaluation of loan terms or requiring additional underwriting. Lenders have specific LTV thresholds that influence interest rates and other loan conditions.

The stage of the loan process also plays a role in the ease of making changes; adjustments are simpler earlier in the process before the loan is fully underwritten. Significant alterations to the down payment, particularly those that substantially change the LTV, may necessitate a re-underwriting of the loan. This process involves the lender re-assessing the borrower’s financial profile and the loan’s risk, which can introduce delays. Individual lender policies also vary, with some offering more flexibility than others regarding down payment adjustments.

Initiating a Down Payment Change with Your Lender

To initiate a down payment change, the first step involves direct communication with your loan officer or lender. Express your intent to modify the down payment amount as soon as the decision is made. The lender will request updated financial documentation to support the proposed change, such as proof of additional funds if increasing the down payment. If reducing the down payment, they may need to verify that your remaining cash reserves meet their requirements.

After reviewing the updated information, the lender will issue revised loan disclosures, including an updated Loan Estimate (LE) and, closer to closing, a new Closing Disclosure (CD). The Closing Disclosure details all final loan terms and closing costs. Federal regulations require a mandatory three-business-day waiting period between the receipt of a revised CD and the scheduled closing date if certain significant changes occur.

The re-underwriting process involves the lender re-verifying income, assets, and credit to ensure the loan meets all eligibility requirements with the new down payment amount. This can lead to additional requests for documentation or explanations. Borrowers should be prepared for potential delays and further information requests as the lender processes the adjustment.

Financial and Timeline Adjustments

Changing the down payment directly impacts the principal loan amount, which in turn affects the monthly mortgage payment. A larger down payment reduces the principal, resulting in lower monthly payments and potentially less interest paid over the life of the loan. Conversely, a smaller down payment increases the principal, leading to higher monthly obligations and greater overall interest accrual.

Alterations to the loan-to-value (LTV) ratio, caused by a changed down payment, can also influence the interest rate offered by the lender. Lenders tier interest rates based on LTV, with lower LTVs correlating with more favorable rates. A significant increase in LTV from a reduced down payment might lead to a slightly higher interest rate, impacting the total cost of the loan.

The requirement for Private Mortgage Insurance (PMI) on conventional loans or Mortgage Insurance Premium (MIP) on FHA loans is also affected by down payment changes. For conventional loans, PMI is required when the LTV exceeds 80%, meaning a down payment of less than 20%. Reducing the down payment below this threshold would likely trigger PMI, adding to the monthly payment. FHA loans always require MIP regardless of the down payment amount.

Adjusting the down payment can also affect certain closing costs. Some lender fees, such as origination charges, might be calculated as a percentage of the loan amount, meaning a larger loan due to a smaller down payment could result in higher fees. Title insurance premiums are also tied to the loan amount or the property’s value. Any significant changes to the loan terms, including the down payment, necessitate re-disclosure and re-underwriting, which can introduce delays to the scheduled closing timeline.