Down Payment & Purchase Price: Definitions & Calculations

Instructor: Tara Schofield

Tara has a PhD in Marketing & Management

Buying a house is exciting, but also overwhelming. It takes preparation to ensure you will have enough for the down payment and understand what the purchase price means.

Buying a House

You've been anticipating this day for years - the day when you are ready to buy a house. However, you are not sure how much cash you need to be able to buy a house and how much you can afford.

Before you even start looking, you talk to a mortgage broker, who looks at your finances and determines you can be approved for a maximum of $200,000 but must have 10% for the down payment. The down payment is taken off of the purchase price and the remainder is the amount that will be financed through the mortgage company.

Understanding the Purchase Price

You start looking for the perfect 3-bedroom, 2-bath house with a small yard near your office. After looking at several houses, you find the perfect home. It is for sale for $225,000, but unfortunately, your budget is only $200,000. All you can do is hope the sellers will come down to your price.

You make an offer for $200,000. Luckily, the owners of the house are anxious to sell and are willing to take your offer, even though it is $25,000 less than what they were originally asking. The purchase price is the amount the buyer and seller of a house agree on. It is the total price of the house, not including closing costs and other fees associated with the house purchase. The buyer agrees to pay the purchase price, and the seller agrees to accept the purchase price. You can move forward with buying the home!

Down Payment

You've found the perfect house. Now you just need to figure out how to pay for it. The first payment due is the down payment, the cash payment you will make for the new house. While there are no-down-payment options, most homebuyers pay 3-25% of the total purchase price out of their own pocket.

Calculating the Down Payment and Purchase Price

The purchase price is the amount both parties agree on for the purchase of the house. The calculations come when figuring out the down payment. Most down payments are based on a percentage of the sales price. Down payments will vary based on the loan, the approval amount, the amount of cash the buyers have, and what is required by the mortgage company. As mentioned before, most down payments will be 3-25% of the purchase price.

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