Why do lenders require a down payment?

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Why do lenders require a down payment?

It protects them should you default on the loan, especially if you fail to make payments in the early years of the loan when more is owed on it. Foreclosure, property fix-up, and resale costs could result in a loss on the mortgage loan.

That is a bad situation the lender wants to avoid. So they have historically required cash down payments of 20 percent of a home’s purchase price.

However, if you purchase private mortgage insurance, the down payment requirement can drop to 5 or 10 percent of the purchase price.

Few lenders will lend the full value of a home unless they have special guarantees, such as that offered by the Veterans Administration (VA) under its mortgage assistance program.

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