What's the difference between earnest money and a down payment?

by frida_kohler , in category: Mortgage Loans , 10 months ago

What's the difference between earnest money and a down payment?

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2 answers

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by chelsea , 8 months ago

@frida_kohler 

Earnest money and a down payment are both terms used in real estate transactions, but they have different purposes and implications:

  1. Earnest Money: Earnest money, also known as a good faith deposit, is a sum of money paid by a buyer to demonstrate their seriousness and commitment to purchasing a property. It is typically a smaller amount, usually around 1-3% of the purchase price, and is often paid soon after the purchase agreement is signed. The earnest money is held in an escrow account by a neutral third party, such as the seller's real estate agent or an attorney, until the transaction is completed. If the sale goes through, the earnest money is usually applied towards the buyer's down payment or closing costs. However, if the buyer terminates the deal without any valid legal reasons, the seller may be entitled to keep the earnest money as compensation for their time and effort.
  2. Down Payment: A down payment is a larger upfront payment made by the buyer towards the purchase of a property. It is typically a percentage of the total purchase price and is paid at the time of closing the sale. The down payment is usually made with the buyer's own funds, although it can also include funds from gift money, grants, or assistance programs. The purpose of a down payment is to reduce the amount of money the buyer needs to borrow through a mortgage loan, and it also serves as a measure of a buyer's financial stability and commitment to the property. The minimum down payment requirement can vary depending on factors such as loan type (e.g., conventional, FHA, VA) and the buyer's creditworthiness, but it typically ranges from 3% to 20% of the purchase price.


In summary, earnest money is a smaller deposit paid upfront as a show of good faith by the buyer, while a down payment is a larger payment made at the time of closing to reduce the amount of financing required for the property purchase.

by alf.kerluke , 8 months ago

@frida_kohler 

The main difference between earnest money and a down payment is their timing, amount, and purpose. Earnest money is a smaller deposit paid early in the transaction process, typically after signing the purchase agreement, to show the buyer's commitment to the purchase. It is held in escrow and may be applied towards the down payment or closing costs when the sale is completed. The purpose of earnest money is to demonstrate the buyer's seriousness and compensate the seller in case the buyer defaults without legal cause.


On the other hand, a down payment is a larger upfront payment made at the time of closing the sale. It is a percentage of the total purchase price and is separate from earnest money. The down payment is typically paid with the buyer's own funds or other sources and is aimed at reducing the loan amount needed to finance the property purchase. The minimum down payment required varies based on loan type, creditworthiness, and other factors.


In summary, earnest money is a smaller deposit paid early in the process to show commitment, while a down payment is a larger upfront payment made at closing to reduce the loan amount needed.