Down payment: What is the purpose?
It’s standard procedure to make a down payment on a home at closing, and lenders have a good reason for wanting you to make one.
Security for the lender
A down payment provides security for the lender. If you put a significant amount of your own money into a home, you are less likely to walk away and default on the loan. Lenders, understandably, want to make sure that they’ll be repaid; your down payment provides that reassurance.
Easier loan approval for you
Another reason for lenders wanting a down payment involves loan approval. Your down payment makes it easier for you to qualify, and the more money you put down, typically, the easier it is for you to be approved. Though it may be possible now to obtain a loan with no down payment whatsoever, qualifying for a loan is a lot easier if you’re able to make a down payment.
Building your equity
When you make a down payment on a home, you’re building equity (the percentage of the property you actually own). And the more you put down, the greater your equity. The more equity you have, the less you need to finance and the less overall interest you will need to pay on your loan. A down payment therefore benefits not only the lender, but you as well.