Down Payment

In depth

The down payment is the initial cash investment by the buyer, expressed as a dollar amount or percentage of the purchase price. In seller-financed deals, down payments often range from 5 to 20 percent, with higher amounts reducing seller risk and improving buyer commitment. Misconception: bigger is not always better; an excessive down payment can leave a buyer cash-poor and unable to handle repairs. Practically, the down payment determines initial loan-to-value, affects the buyer's likelihood of walking away, and signals seriousness in negotiations. Sellers should require down payments in cleared funds (cashier's check or wire) to avoid ACH reversal risk. The IRS treats the down payment as part of the buyer's basis and the seller's gross profit ratio calculation under installment sale rules.