Earnest Money vs Down Payment: What’s the Difference?

Have you ever wondered why homebuyers have to pay both earnest money and a down payment?

They both sound like a huge expense and they both involve paying money upfront but they have different purposes and are used at different stages in the homebuying process.

Understanding how each one works helps you budget better and helps you know exactly where your money is going.

Let's jump right in!

So What Is An Earnest Money?

Earnest money is like a good faith deposit you make when submitting an offer on a home. You show to the seller that you are serious about buying. This is like a signal that you are ready to move forward with the deal.

Here’s how it usually works:

• You pay about 1% to 3% of the home’s price (but the amount is totally up to you)
• The money often times sits in an escrow account until closing. This is a neutral third-party account managed by an escrow or title company, so neither you nor the seller can touch the money until the deal moves forward or falls through.
• It’s applied to your down payment or closing costs if the home sale goes through.

If something in your contract doesn’t go as planned (for example, the inspection reveals serious issues or your financing falls through) you usually get your earnest money back when you have contingencies in place.

But if you back out of the deal for a reason that isn’t covered by the contingencies, the seller typically keeps the earnest money as compensation for taking the home off the market.

What Is a Down Payment?

You probably already know what this one is but for the sake of this discussion, let’s define it.

Your down payment is the amount you pay upfront when you buy the home. This is the part of the home purchase you pay out of pocket. The rest comes from your mortgage lender (or if you pay all cash, you down payment is the entire payment for the home).

Let's say the home you want costs $400,000 and you put 10% down, that’s $40,000 from you and a $360,000 loan from the bank.

The amount you choose to put down affects things like your monthly payment, loan terms, and whether you will need private mortgage insurance(PMI).

And you may be wondering if the earnest money you paid is part of the down payment.

The answer is yes. Most of the time.

When you close on the home, your earnest money is applied toward your down payment or closing costs.

Think of it as paying part of your down payment early. The money you put down as earnest money doesn’t go to waste. It is credited back to the transaction.

Can You Get Earnest Money Back?

It really depends on the situation.

You usually get your earnest money back if:

• Your offer includes contingencies (like inspection, financing, or appraisal) and one of them isn’t met.
• The seller fails to meet contract terms.

And you may lose it if:

• You back out of the deal for personal reasons not covered in the contract.
• You miss key deadlines or fail to meet your obligations as the buyer.

So keep in mind to always read your purchase agreement carefully. It is written exactly when you are protected and when your deposit could be forfeited.

To Sum It Up

Your earnest money is the first sign to the seller that you are serious and ready to buy. Your down payment is actually what often seals the deal.

Earnest money happens early to show commitment and the down payment happens at closing to finalize the purchase.

Understanding how they work together makes the homebuying process smoother and helps you know where your money is going every step of the way.

FAQs About Earnest Money in the Homebuying Process

How much earnest money should you put down?

It depends on your local market and the seller’s expectations, but most buyers put down 1% to 3% of the home’s purchase price. In a competitive market, offering a higher deposit can make your offer stand out.

Where does the earnest money go?

Your earnest money most times goes into an escrow account held by a neutral third party like a title or escrow company. It stays there until the sale closes, or the deal is canceled. It's important to confirm with your agent where your earnest money will be held.

What is a typical earnest money deposit amount?

For a $400,000 home, a typical earnest money deposit is between $4,000 and $12,000.

How is the earnest money deposit paid?

Earnest money is typically paid by personal check, cashier’s check, or wire transfer to the escrow or title company. Cash payments are uncommon because they’re harder to document and track for the transaction.

What is earnest money used for?

When the sale closes, your earnest money is applied to your down payment or closing costs. It’s part of the money you already planned to pay. It is not an extra charge.

What happens to earnest money if the buyer backs out?

If you back out for a reason protected by a contingency, you’ll usually get your earnest money back. If you walk away for a reason that isn’t covered, the seller typically keeps it.

How long does it take to get earnest money back?

If the deal falls through and you’re entitled to a refund, you’ll usually get your earnest money back within a few days to a week, depending on the escrow company’s process.

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