Why do I need a down payment and how do I calculate it?
A down payment demonstrates to the lender that you are willing to share a portion of the risk associated with the loan. It adds security to the loan and ensures that you have some skin in the game.
Some borrowers hate to hear the term down payment. In fact, you wouldn't believe how many prospective borrowers tell me, "There's absolutely no risk with my project. My down payment should be zero!" The reality is, believe it or not, every loan involves risk for both the lender and the borrower. A down payment simply helps to mitigate or share that risk. The greater the down payment percentage the lower the perceived risk from the lender's perspective in most cases.
While a down payment is a necessary aspect of each loan there are ways that we can reduce or possibly even eliminate your down payment. Sometimes it requires us to get a little creative but I have resolved down payment issues on and closed many loans ranging from as low as $150,000 up to over $6,000,000. Contact me today to ask how I can help you minimize your loan's down payment.
How can I calculate my estimated down payment?
Calculating or estimating your down payment is easy if you understand the lender's limitations on the LTC or LTV of your construction loan and if your understand both your future value and your costs. If you aren't sure what those limitations, costs or values are you can contact me and I can help you, or spend some time putting some numbers together first.
Here are a couple of formulas that you can use to calculate the #loandownpayment:
Basically, if all of your combined costs (including financing costs) exceed the maximum permitted loan amount based on the lender's limitations on your LTV or LTC ratios, then the difference is the down payment. Click HERE to read my post describing LTC calculations, which gives examples and more detailed insight into how some of the numbers are calculated including the down payment.
When should I consider a larger down payment than what is required?
In some cases you may wish to provide a larger down payment than what is required by the lender. This is because larger down payment percentages reduce the risk for a lender and may result in a lower rate or fee structure if you ask for it. If you have the money and want to pay less for your loan it is definitely something you should consider putting on the table if you hope to negotiate your rate. Also, in some instances, if the lender perceives your loan as particularly risky for some reason they may ask for a lower LTC or LTV ratio, which in effect could require you to add more out of pocket funds (down payment) at closing.