Earnest Money Deposit vs. Down Payment

There is a significant difference between the two terms actually. An earnest money deposit or good faith money is an agreed-upon dollar amount that is given by the buyer to their hired real estate agent and delivered to their broker. This deposit sits in a neutral bank account called an escrow account that is usually maintained by the Brokerage. The earnest money deposit is given as “consideration” for a contract as a sign of good faith when placing an offer on a home.

It essentially reinforces to the seller that the buyer making the offer on their home is serious, and will complete the purchase once the offer has been initiated and all contingencies like inspections and appraisals have been satisfied. This earnest money deposit is customary and should be weighed seriously before submitting your offer since the seller may be able to keep your deposit money if you pull out of the deal for a reason that isn’t allowed under the purchase contract. Typically the earnest money deposit is 1-2% of the asking price, but can be negotiated between the buyer and seller and varies based on the customs of the local market.

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A down payment is submitted upon closing on home and is the amount of money that the Lender requires of the buyer to put into the purchase of property. The down payment is determined based upon the type of loan offered by the Lender but typically runs from 3.5% to upwards of 20%. This amount is not due until your closing day and is deducted from your total balance on the loan which you will see recorded on your settlement statement (HUD-1 statement, officially). The amount of money you place in your down payment affects your LTV or loan-to-value ratio and some homes and loan programs have certain requirements. It is always best to seek a few referrals to highly regarded lenders to get advice on which loan programs will work for your situation. You always have a choice of lender. If you are unsure of which lenders to consider, you can always contact your agent for a list of lender suggestions or contact us here at Nestiny for a curated list of reputable lenders for your area.

Want more homebuying advice? Nestiny is a great place for homebuyer education and to help you gauge how ready you are to buy a home. Journey Homeward allows you to enter all of your wants and needs while the True Affordability Tool will break down your budget, showing what you can comfortably afford. You will also receive a free Ready Report that is personalized based upon the information that you entered. This report will give you a vital head start in the home buying journey, saving you valuable time and money.

For more helpful tips and guidance about all things home, please join Nestiny by signing up below for free access to all our tools, games and money saving advice. So what are you waiting for? Get started on your journey today!

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