The Difference Between Earnest Money and Down Payment (2024)

FAQs

Is earnest money deposit the same as down payment? ›

While many inexperienced home buyers think that this is the down payment, it really isn't. The earnest money deposit is made along with your offer to show the buyer that you are a serious buyer and goes TOWARDS your down payment. The down payment, of course, is much larger and comes at the time of closing.

In most cases, earnest money is refundable to the buyer if the sale does not go through for reasons that are not the fault of the buyer. Some common situations where earnest money is returned include: The home does not appraise for the purchase price.

This deposit, also known as a good faith deposit, is commonly held in an escrow account until the closing. Subsequently, upon closing on the home, the earnest money deposit is applied toward the down payment or closing costs.

The earnest money deposit serves as the liquidated damages amount in real estate contracts. If the buyer defaults, the seller can keep the deposit regardless of the actual amount of damages. That also means that if the damages are higher than the liquidated damages – you're out of luck!

While the earnest money deposit helps give the seller something to show for lost time if the deal falls through, there are certain “contingency clauses” you can put into your offer that will allow you to back out of the deal and keep your money.

What Is Earnest Money? In real estate, earnest money is effectively a deposit to buy a home. Usually, it ranges between 1-10% of the home's sale price. While earnest money doesn't obligate a buyer to purchase a home, it does require the seller to take the property off of the market during the appraisal process.

It depends on how far along your deal was. If you back out before a contract was signed, there are likely to be no consequences. If you already had a signed purchase agreement, though, you could potentially lose your earnest money deposit or even be sued.

You can expect your earnest money back if: The home doesn't pass inspection. The home appraises below its sale price. You are unable to obtain a mortgage.

In California, earnest money is typically refundable if the buyer backs out of the deal for a reason that is allowed under the contract. Some common reasons that allow a buyer to back out include: The home does not appraise for the agreed-upon price. The home inspection reveals major defects.

Earnest money is typically held by a third party in an escrow account. The money remains in the account while both parties complete the terms of the contract. At closing, the funds are returned to the buyer and are often applied to the down payment or closing costs.

Why would a seller want more earnest money? ›

Sellers tend to favor these good faith deposits because they want to ensure that the sale won't fall through. Earnest money can act as added insurance for both parties in the transaction. Earnest money could also lower the amount you need at closing because it's applied directly to your down payment or closing costs.

A deposit is held by a third party (often the buyer's agent's brokerage) in trust, until the completion date when it forms a part of the down payment. DOWN PAYMENT: A down payment is the TOTAL amount of funds that the buyer puts forward themselves to go towards purchasing a property.

In a typical market, “It's really hard for a buyer to lose their earnest money,” says Allen. If the buyer is working within the guided timeline and purchasing contract, they have several opportunities to break the contract and walk away from the deal with their earnest money.

Even if the seller doesn't pursue legal action should you not pay earnest money following an agreement to do so, they'll almost certainly terminate the purchase contract. This will, of course, mean you lose the right to purchase the property, allowing other interested parties to come forward and stake their claim.

Earnest money usually is around 1% to 3% of the sale price, and typically is held in an escrow account until closing. If the sale is successful, the earnest money is applied to the buyer's down payment or closing costs.

The deposit is part of the down payment, not in addition to it. So, if you put down a $50,000 deposit, you would then owe the remaining $150,000 of the down payment at closing. Therefore, the total cash you would need upfront is still $200,000 at least.

Can you borrow earnest money? It is not common or recommended to get a personal loan for an earnest money deposit. Besides enticing the seller, a good faith deposit shows a lender you are financially prepared for a mortgage. If you're concerned about coming up with earnest money for a house, it could raise a flag.

Earnest money, also known as earnest money deposit (EMD) or simply earnest deposit, is a payment made by a buyer to a seller as a demonstration of the buyer's sincere intention to purchase a property or enter into a business transaction. It is a way for the buyer to show commitment and seriousness about the deal.

Earnest money is typically held by a third party in an escrow account. The money remains in the account while both parties complete the terms of the contract. At closing, the funds are returned to the buyer and are often applied to the down payment or closing costs.