Earnest Money vs. Down Payment: What's the Difference?

Prepping to buy your dream home? One thing you'll want to prepare for is to provide your "earnest money." Is this different from your down payment? That's what we're breaking down in this article. Read on to learn more.

Let's start with earnest money.

What is Earnest Money?

When you make an offer, and it gets accepted, earnest money is a deposit you put into an escrow account. It's a way to demonstrate your commitment to buying the property. Typically, earnest money ranges from 1% to 3% of the sale price, but it can be higher in competitive markets.

What is a Down Payment?

On the other hand, a down payment is the portion of the total purchase price you pay at closing, especially if you're using a mortgage loan to finance your home. The amount of your down payment depends on factors like your comfort level and your lender's requirements. It usually falls between 3% and 20% of the purchase price.

When it's time to close on your new home, all the funds will be distributed accordingly.

Your earnest money will be applied towards your down payment and disbursed to your lender through the title or closing agent.

Since earnest money is typically a smaller percentage, you'll likely need to contribute more towards your down payment at closing. These closing cost fees are associated with finalizing the sale and will be added to the final sale price.

Now, what happens to earnest money if the deal falls through?

If there's a contingency in your purchase and sale agreement, such as a home inspection, appraisal, or financing contingency, your earnest money is usually refundable to you, the buyer.

However, you may risk losing your earnest money to the seller if you decide to back out without a valid contingency. On the flip side, if the seller cancels the deal, your earnest money will be refunded to you in the same form it was received.

To make sure you protect your earnest money, it's wise to include contingencies in your agreement. These safeguards give you peace of mind and allow you to keep your deposit should any issues arise during the process.

As you prepare for this exciting milestone, our online calculator can help you estimate a comfortable mortgage payment based on different loan details. It's essential to feel financially prepared when you're ready to buy a home.

We're your trusted guide for understanding all the ins and outs of home financing!

Understanding earnest money and down payment is key to demonstrating commitment and protecting your interests throughout the home-buying journey. With this knowledge, you can confidently move forward and turn your dream of homeownership into a reality.