What is an advance?

A down payment is a portion of available cash given at the beginning of a loan to demonstrate a commitment to purchase. It is often administered in cash, although in some cases it may be linked to an alternative line of credit. This money is usually only used on sales that involve a large amount of money. Loans to buy homes and land are the most common loans that require such a payment, although loans for cars, boats and other luxury items purchased on credit may also require a portion of the total cost upfront.

The down payment system exists because there is a proven link between the actual investment value a borrower has in their purchase and their faithfulness to continue to make regular payments until the full amount owed is paid. This payment works as a kind of insurance for lenders, as borrowers know that if they don't pay, they will not only lose the property they were buying, but also the money they paid. The traditional down payment on a home in the United States has been 20%, an amount that is enough to tie most people to their loans. However, in recent years, rising costs of ownership have made saving up to 20% difficult, if not impossible, for many families.

Several incentive programs and more complex loan solutions, which can reduce the required down payment to zero, now exist for both new and veteran buyers. The 80-20 loan arrangement is one that has become relatively popular, in which the first 80% of the loan is taken out as a first mortgage and the remaining 20% ​​is taken out as a second mortgage, leaving the buyer with no down payment, payment commitment. , simply less beneficial terms than they might have. Interest-only loans are another avenue that can allow a buyer to pay substantially less than 20% down payment, usually as low as 3-6% of the total cost.

Advance "donations" also exist through non-profit organizations such as Nehemiah and AmeriDream. These organizations use a loophole in US housing regulations that prohibit a seller from giving cash directly to a buyer and awarding cash to the buyer, usually with a slightly higher final price as compensation. While the traditional 20% seems high to many Americans, many other developed nations have much higher average payouts. Mexico has an average of 30%, Germany 40% and Italy 50% of the final cost.