There are several methods to calculate a down payment. Here are the most common ways to calculate a down payment:
Percentage of Purchase Price
This is the most straightforward method!
Which is calculating a specific percentage of the total purchase price of the property.
Common down payment percentages range from 3% to 20% or more, depending on the type of mortgage loan and lender requirements.
For example, if the purchase price of the home is $250,000 and the down payment percentage is 10%, you would need to contribute $25,000 as your down payment.
$250,000 x .10 (or 10%) = $25,000 Down Payment.
Fixed Dollar Amount
In some cases, homebuyers may choose to calculate their down payment as a fixed dollar amount instead of a percentage of the purchase price.
This approach allows buyers to specify the exact amount they want to contribute upfront, regardless of the property’s price.
For example, if you’ve saved $50,000 for a down payment and plan to use that amount towards your home purchase, you would simply apply the $50,000 as your down payment.
Keep in mind that this dollar amount still needs to be the minimum amount (or percentage) you qualify for provided by the lender!
If the lender requires a 10% down payment. Like the previous example, a $250,000 purchase price with a required 10% down payment, means you as the buyer will be able to add any amount greater than $25,000.
Mortgage Loan-to-Value Ratio (LTV)
The loan-to-value ratio is another strategy that compares the amount of the mortgage loan to the appraised value of the property.
To calculate your down payment using this method, subtract the desired loan-to-value ratio from 100% to determine the percentage of the purchase price that you’ll need to cover with your down payment.
For example, if you aim for an 80% loan-to-value ratio, you would need to provide a 20% down payment.
Suppose you’re eyeing a home valued at $300,000, and you aim for an 80% LTV ratio. Here’s how you calculate your down payment:
Subtract the desired LTV ratio from 100%:
100% – 80% = 20%
The result, 20%, represents the portion of the purchase price that you must cover with your down payment.
Apply the percentage to the purchase price:
20% of $300,000 = $60,000
So, in this scenario, you would need to provide a down payment of $60,000 to achieve an 80% LTV ratio.
Homebuyers primarily rely on their lender to present the numbers and how much a down payment is required.
Otherwise, buyers use the first method: Percentage of the purchase price to calculate their down payment.
It’s essential to consider your financial situation, loan options, and long-term homeownership goals when calculating your down payment.
Consulting with a mortgage lender or financial advisor can provide personalized guidance and help you determine the most suitable approach for your specific circumstances.