Earnest Money Deposit vs. Down Payment
Putting down an earnest money deposit on a home lets the seller know that you're a serious buyer. But do you know how it differs from a down payment? There is a significant difference between the two terms actually. Let's go over each of them.
Earnest Money Deposit
An earnest money deposit, also called 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 buyer then takes the earnest money deposit into consideration along with the purchase offer.
An earnest money deposit signals to the seller that the buyer is serious about making an offer on the home. It implies that the purchase will be completed once the offer is accepted and all the contingencies (like inspections and appraisals) have been satisfied. The earnest money deposit is customary and should be weighed seriously before submitting an offer since the seller may be able to keep the deposit money if the buyer pull out of the deal for a reason that isn’t allowed under the purchase contract.
Each state may have different policies for determining the amount of the earnest money deposit, but it's typically 1-2% of the asking price. In a seller's market this could be as high as 3%, but in a buyer's market the price may be lower when there is less demand for homes. The deposit can be negotiated between the buyer and seller and varies based on the customs of the local market too, so do your research with your lender and speak to your Agent to make sure.
Once the purchase offer is accepted, the earnest money deposit goes into escrow. Usually it is held by the title company, but it can also go be held by the real estate brokerage. Once the home sale is finalized, the earnest money deposit is applied toward the down payment.
Down Payment
A down payment is submitted upon closing on a home and is the amount of money that the lender requires of the buyer to put into the purchase of property. The amount of the down payment is determined by the type of loan, 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 (formerly the HUD-1 statement).
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.
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