This Is the Single Biggest Reason to Make a Big Down Payment on a Home

Putting down a large down payment is a good move.

Many mortgage lenders allow people to buy a house with a low down payment. In fact, some conventional lenders let you put as little as 3% of the home's value down when qualifying for a mortgage to purchase a property. And there are some government-backed loans, such as VA loans, where there's no down payment mandate at all and it's possible to borrow 100% of what the home is worth.

While making a small down payment may seem attractive since it allows you to buy a property sooner without having to spend months or years saving up, it's actually a bad idea in many cases. That's true even if mortgage lenders allow it.

There's a very important reason why most borrowers should try to make a big down payment before moving forward.

A big down payment is important to minimize this huge risk

The single biggest reason why you would want to make a big down payment on a home is to make sure you do not end up owing more money for the property than you would be able to sell it for.

If you borrow the full amount you're paying for the home, or close to that amount, you could end up having a really serious problem if property values go down even a little bit. It takes a lot of time for your mortgage balance to decline by a meaningful amount in the beginning because most of your early payments just go towards covering interest. So if property values fall even slightly, you might have such a large mortgage balance even after a few years that you owe thousands more than you could sell your house for.

That's a really bad situation to find yourself in because if you needed to sell the house for any reason at all, you might not be able to do so without bringing extra money to the table to make up for the gap between your loan balance and the market value of your property. While you might be able to get the bank to agree to a short sale -- or to accept less money than you owe on the home -- if you had to leave in an emergency situation, this would do long-term damage to your credit and make selling much more complicated.

And you actually face an even bigger risk than you might think of being trapped in your home because this can happen even if property values don't fall but if you need to move shortly after buying and your property hasn't gone up in value much yet. That's because when you sell a home, there are a lot of transaction costs that you incur. You generally must pay commission to a real estate agent plus closing costs, and all of this can add up to tens of thousands of extra dollars.

You'll have to be able to pay off your home mortgage in full and have the money to cover closing costs, and if you've made a small down payment there's a very good chance selling your house won't generate enough profits to do that.

Should you buy a home if you can't put much money down?

Buying a home without putting much down can have some benefits, including allowing you to start benefiting from building equity and property appreciation sooner than if you'd waited and saved more money. But you need to be aware of the very serious risk and make a plan to have money saved in case you need to move quickly before you could sell your house for the funds you need to pay all you owe and more.