Upfront cash requirements are the single most important impediment to homeownership. First and foremost, cash is required for the down payment, which lenders insist on to protect themselves.
The down payment is a buffer against loss in the event the borrower defaults. It is also a rough indicator of the borrower’s financial discipline, in the sense that those able to save enough for a down payment will default less frequently than those who can’t.
But cash is also required to meet settlement costs. This is a range of upfront charges, some by lenders and some by third parties such as title insurers, appraisers and local governments.
Unlike the down payment, these charges do not make the loan any safer for the lender, and therefore lenders tend to be indulgent of devices for reducing or eliminating them. These devices convert settlement costs into higher monthly payments.