Down Payment
A down payment is the money in a real estate transaction that is provided in cash, i.e. not financed. The higher the down payment, the lower the amount to be financed, and the lower your monthly payment.
Buyers often think they need to make a down payment of 20% of the purchase price - this is a myth! If you put less than 20% down, you will have a PMI (private mortgage insurance) payment on top of your mortgage payment each month. But you shouldn’t avoid buying a home just because you don’t have 20% to put down! The opportunity to build equity is there even if you put 5% down - especially in a market where we’ve seen lots of appreciation (like Denver).
Even if you do have 20%, but it would empty your savings, it may still make more sense to lower your down payment amount and have that PMI payment each month. Once you’ve gained enough equity in your home (whether by paying down your mortgage, through appreciation, or a combination), the PMI goes away. If you’re at 20% equity, you can refinance and drop the PMI, or it will automatically go away once you hit 22%. If you have more questions about this, it’s a great idea to talk with a lender - I have some great ones. Contact me for a recommendation!
Down Payment Assistance (DPA)
Down Payment Assistance programs provide exactly that - assistance with a down payment. This assistance can come in the form of a second mortgage or a grant, and may be zero-interest, deferrable, or forgiveable with certain terms and requirements. In Denver, CHFA is one provider of DPA, but there are others. Your lender can go through your options - contact me for a lender recommendation!
Due Diligence
Due diligence refers to two things: 1) the work and attention that a buyer puts into learning information about the property they are purchasing (as in “doing one’s due diligence”); or 2) a set of documents and related deadlines in the contract period.
As to the first: as a buyer, you want to take every opportunity to learn what you can about the property you are purchasing. This includes hiring an inspector, reviewing the inspection report, seller’s property disclosure, and title documentation, securing property insurance that is acceptable to you, and potentially doing your own research into school districts or any other details that may be important to you.
Due Diligence documents are a category of materials that the buyer requests from the seller in the Contract to Buy and Sell Real Estate. I usually ask for any permits, blueprints, invoices, past inspection reports, manuals, etc that the seller has in their possession, as well as information on any existing leases. The reality of these documents can vary - I’ve had seen everything from a single stack of appliance manuals to blueprints and permits going back 20 years.
Earnest Money
Earnest money is a good faith deposit that is submitted by the buyer shortly after a seller accepts their offer. Earnest money is usually due within 3 business days of mutual execution of the contract (MEC), meaning that both buyer and seller have signed.
Earnest money is usually betwen 1-3% of the purchase price, though that amount is determined by the seller. That amount is also a minimum - a buyer can offer a larger earnest money amount as a potential incentive in a competitive offer situation. Earnest money is applied to a buyer’s down payment at closing.
Earnest money is usually held by the title company handling the transaction, though sometimes it is held by the listing agent’s brokerage. If a buyer terminates the contract within the appropriate deadlines and in good faith, they are entitled to the return of their earnest money. On the other hand, if a buyer terminates in bad faith or outside of the bounds of the contract, the seller may be able to keep the earnest money.
Escalation Clause
This is a clause in a contract that states that if the seller receives an offer with a higher price than this offer, the buyer will beat that offer. For example, if a buyer offers $525,000, but could go up to $540,000 if needed, they could offer to beat any verified offer by $1000, up to $540,000.
These clauses can be useful, but can also complicate things; listing agents may ask for no escalation clauses and instead for buyers to simply bring their "highest and best."