The Difference Between Earnest Money and Down Payment

When buying your home, you will be asked for an “Earnest money” deposit.  While many inexperienced home buyers think that this is the down payment, it really isn’t.  The earnest money deposit is made along with your offer to show the buyer that you are a serious buyer and goes TOWARDS your down payment.  The down payment, of course, is much larger and comes at the time of closing.  Here’s the difference between earnest money and down payment.

The main thing to remember here is that the earnest money deposit is for the seller, and the down payment is for the lender.

Earnest money is typically 1% to 2% of the total purchase price, as opposed to the 3.5% to 20% for your down payment.  It’s essentially a signal to the seller that your offer comes with enough money to actually purchase the home.

Your down payment is the first payment made towards the purchase of your home, sending the same message to the lender, that you have the money to pay off the rest of the mortgage.  Whether it’s an FHA Loan at 3.5%, a conventional loan at 20%, or a VA loan with no money down, your down payment shows the lender your intent to pay.

When you make an earnest money payment, you are telling the seller that you are making a serious offer.  This amount can vary depending on your situation or locale.  You can sometimes get away with a $500 deposit, but often have to put down as much as 1% to 2% of the purchase offer to show that you are legitimate.  You should be careful though.  Earnest money shows that you are serious, and if you aren’t, if you back out or there are problems with the contract, you can lose that earnest money in the transaction.

Call The Home Loan Expert Team in St. Louis at (314) 781-9700, Chicago at (773) 770-4727, Indianapolis at (317) 550-1515 or Nashville at (615) 810-8555. You can always apply online at www.thehomeloanexpert.com, and we’re also open on Saturdays and will come to you to help close your loan. We work hard to make it easy on you.  Nobody gets lower rates on better loans than The Home Loan Expert, Ryan Kelley, why go anywhere else?

Call Us! (800) 991-6494.