Difference Between Down Payment & Earnest Money
I’ve noticed that some confusion exists with buyers about down payment vs. earnest money deposit. So, I will explain here the difference.
Earnest Money Deposit
This is the money you pay into a neutral account, usually to the Brokerage you are going through, at the time you submit an offer on your Real Estate Purchase Contract to buy. It is asked for up front, as part of your offer. It is usually to be approximately 1% of the asking price. Sometimes, on more expensive properties, it can be rounded down some. For example, a $450,000 home could have a $4000 earnest money deposit. The amount submitted is negotiable between the buyer and seller. This amount helps to show how earnest you are and is not necessarily a set part of the contract- just what the seller is willing to take or not take as part of the offer. The earnest money (once set) is part of the contract and has rules as to who the earnest money goes to once certain parts of the contract are either met or not met.
Down Payment
Your down payment is what you pay at Settlement/Closing that is the rest of the money that the Lender did not supply. To use an example, if you have an 80% to 20% loan to value on a $200,000 dollar house, then the Lender has agreed that they will come up with $160,000 and you have agreed to come up with $40,000. At closing the Lender will come through with a money wire for $160,000 AND you will need to bring your $40,000 down payment to put with that at Settlement/Closing in order for the property to transfer to you, the Buyer. When your agent writes the purchase contract there will actually be a column that specifies what the down payment will be vs. the loan amount ($160,000 in this case). This is to give the other side a good idea. The seller usually never holds the buyer to exact figures on that portion of the contract. It does highlight however, the necessity to have such information figured out before hand.
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