Can you get down payment back on a house? The answer depends on the situation. Did the deal close, or did it all through?
- Down payment on a house goes towards the purchase price at closing
- You do not get your down payment back when you sell your house
- When you sell hopefully you recoup the money you paid because of rising land prices
Whether you get your down payment back on your house depends on the market conditions and how well you handle your finances.
What Happens to the Down Payment on a House?
The down payment goes toward the sale price of the home. For example, if you buy a house for $300,000, a 20% down payment is $60,000. You pay this $60,000 at closing, and you mortgage $240,000. It is part of the cash you need to close.
Goes Towards Principal
Many people ask does their down payment go towards the principal. It does. The Consumer Financial Protection Bureau reminds us that “the principal is the amount you borrowed and have to pay back, and interest is what the lender charges for lending you the money.” The down payment, then, directly reduces the amount that you must mortgage.
Change Before Closing
Can you change your down payment before closing? The answer depends on whether you will pay more money or less. If you want to make a larger deposit and reduce what you borrow, then neither the seller nor the bank will object.
Where you run into problems is when you want to reduce the amount you put down. An unexpected expense is usually the reason most people want to reduce the amount. This, however, can cause big problems. If you reduce the amount, it causes three big issues:
- You incur additional fees because the bank must change its paperwork
- It may push back the timeline affecting the seller, especially if they want to close on another house
- The bank may not approve your loan
While the first two points may derail the transaction, the last one certainly will. Your lender cares very much what you put down. In most cases, they require a certain amount, usually 20% of conventional loans. If you reduce this after you sing the contract it affects underwriting. If you reduce the deposit there is a very good chance the bank will not approve your loan, and you will lose the house.
Do You Get Your Down Payment Back on a House When You Sell?
You do not get your down payment back when you sell your house. It goes directly to the principal you owe, as stated above. When you sell the house, the new buyer makes a completely different offer based on what they think the house is worth.
Ideally, when you sell the market value increases from when you bought the property. If this is the case, you may get more money back. For instance, if you buy a house for $200,000 and mortgage $160,000 (20% down) the real estate market may grow in value. Let us assume you can sell your house after several years for $300,000. You must pay the real estate commission (usually 6%) and other expenses that may come to around $25,000. Let us also assume in this hypothetical that you paid down your mortgage to where you only owe $100,000. In this case you will get a check for $175,000 at closing. This is a good deal more than the $40,000 you originally put down.
On the other hand, you may not get that much money back. Let us look at another example to illustrate. In this hypothetical housing prices did not increase at all. Again, you bought the house for $200,000 and put 20% down. Let us also assume you only stay in the house a couple of years, so you do not pay down your mortgage very much, maybe $10,000. In this case, you sell for the same price and incur the same closing costs. The bank takes $150,000 and closing costs total $25,000 again. In this case you walk away with $25,000, much less than the $40,000 you put down.
If housing prices fall you may not get any money back. In fact, you may owe more than the house is worth.
How to Get Your Down Payment Back on a House
There are two ways to approach this question. First, if the deal falls through, how do you recover your cash? Second, if you close, live in the home, and then resell how can you get your money back?
In the first case, you may be confusing earnest money with the down payment. You bring the down payment to closing. You will not actually pay this sum until right at the end. On the other hand, you deposit earnest money up front. An escrow agent holds this until either the deal closes or fall apart. If your transaction fails, you may lose this money. It depends on whether an issue triggered a clause in the contract. If this is the case, then the buyer may recover that money. If not, then the seller may claim it. Finally, if there is a dispute it may go to arbitration, or even to court.
In the second case, you do not directly get your down payment back. You may sell the property for more than you bought it, and that may be more than the amount you put down. However, there is no guarantee this will happen. Zillow has an excellent article outlining all the issues involved when you have a mortgage and want to sell your house, including equity, HELOCs, escrow money, and home sale contingencies.
Final Thoughts About Can You Get Your Down Payment Back on a House
You can get your down payment back on your house and often even more. It is not a direct transfer, though. You down payment went to your mortgage. A new buyer will get a new mortgage, separate from yours.
We showed, above, how it is possible to walk away with even more money than you put down. Nothing is certain, though. You may lose money if house prices slide.