Buying a home can sometimes be a confusing experience. One of the more particularly confusing experiences is the earnest money deposit versus the down payment. Before you make an offer on a duplex, town home, or single family home, it is important that you understand what each is.
What Is an Earnest Money Deposit?
When you make an offer on a home, the seller needs some type of reassurance that you are serious about your offer. Without that reassurance, the seller could continue to field offers for his or home. That is where the earnest money deposit comes in.
The earnest money deposit is simply a good faith deposit to show the seller you actually want to buy his or her home. The deposit gives the seller the confidence needed to take his or her home off of the market and to look forward to closing. On closing day, if there are no problems, the earnest money deposit will be used to pay towards the amount that is owed on the home.
In the event that you and the seller do not make it to closing day, you will likely get the earnest money back. However, if you breached the agreement that you and the seller had, there is a chance that he or she gets to keep the money. For instance, if you backed out of the purchase of the home for a reason that was not covered in your purchase agreement, there is a good chance you could lose your deposit.
What Is the Down Payment?
Whereas the earnest money deposit provides reassurance for the seller, the down payment provides it for your mortgage lender. The down payment represents a percentage of the final cost of the home. The amount that you are required to pay could vary. The lender will set the percentage you need to pay.
Unlike earnest money, which is paid to the seller and put into an escrow account until closing, the down payment stays in your pocket until closing. At the closing, you will be expected to pay the down payment and any other fees that the lender requires. If you decide to back out of the purchase of the home before closing, you do not have to worry about losing the down payment. If you do continue with the purchase, the money will be applied to the purchase price of the home.
Talk to your real estate agent to learn more about both the earnest money deposit and down payment. You can also receive further guidance on the process of buying a home
