Learning The Lingo: Earnest Money Deposit vs. Down Payment

Every industry has its jargon, and real estate is no exception. Don’t worry, we’ve got you covered. Here is a quick overview of two terms you will hear or read about at some point during your house search: earnest money deposit and down payment.

Earnest Money Deposit

First of all, an earnest money deposit and a down payment are two separate monetary transactions in purchasing a home.

An earnest money deposit is good faith money, provided by a potential homebuyer, in the amount of 1% to 3% of the price of the home, which is held in an escrow account by a third party, a title company or real estate brokerage.

It’s a way of letting a seller know that a homebuyer is serious about buying a home, a common tactic by homebuyers, especially during a seller’s market when the demand for housing is high.

Once an earnest money deposit is made, both parties, the homebuyer and seller, agree to contract terms. If the homebuyer violates the terms of the contract, the deposit would go to the seller and if the seller violates the contract terms, the deposit would be returned to the homebuyer.

Once an offer has been accepted, the earnest money deposit is applied to the down payment of a home or toward closing costs.

Down Payment

The earnest money deposit initiates the homebuying process with the hope that the seller accepts your offer. Once the seller has accepted the offer, a down payment initiates the purchase of the desired home.

When a homebuyer applies for a mortgage loan, the mortgage lender will require the homebuyer to provide an initial payment toward the purchase of the home; this can range from 3% to 20% down payment due to the seller at closing.

How Much Exactly for an Earnest Money Deposit and a Down Payment?

The amount needed will vary from one potential homeowner to another, but there are professionals to help guide you on your homebuying journey. Your real estate agent can offer assistance regarding the earnest money deposit, and contact your local lender to discuss down payment options available to you.