Earnest Money vs Down Payment: What’s the Difference?

Home buyers signing documents

What is earnest money?

Earnest money, sometimes called a “good faith deposit,” is a sum of money that is included with your offer to purchase a home. Earnest money has become standard, especially in today’s competitive real estate markets. The purpose of earnest money is to tell the seller that you’re serious about purchasing the home.

By backing up your offer with some cash, a seller is more likely to trust that you’ll follow through with the home purchase. This is important because, when the seller accepts your offer (AKA “purchase contract”), the seller is taking their home off the market. If the deal falls through, they’ll have to re-list and spend more time looking for another buyer.

Is Earnest Money Refundable?

While your offer to purchase a home will detail how much money you intend to give as your good faith deposit, you won’t have to send the money until the offer is accepted. Expect the check to be cashed right away, but it does not belong to the seller—the money is held in an escrow account.

Your earnest money will be held in the escrow account until closing. This is because, under certain circumstances, your deposit is . For instance, if the seller backs out of the deal, you will always get your earnest money back. But there are other ways you could get a refund, too.

While the earnest money deposit helps give the seller something to show for lost time if the deal falls through, there are certain “contingency clauses” you can put into your offer that will allow you to back out of the deal and keep your money. Common contingency clauses include the following.

  • If you make your offer “contingent upon appraisal” and the home appraises at a value less than what you intend to pay for it, you will be able to get your deposit back and exit the deal if the buyer and seller don’t agree to an amended purchase price.
  • If you make your offer “contingent upon inspection” and a home inspector fails the property or finds major issues that were not disclosed to you before (i.e., water damage, mold, etc.), you could either adjust your offer, ask the seller to remedy the issues, or back out of the deal.
  • If you make your offer “contingent upon financing” and you fail to secure financing for the home (either because you end up not qualifying or because the lender finds the property unacceptable, you could back out of the deal and get your deposit back.

There are many other contingencies that you can choose to write into your offer, but your real estate agent will be the first one to warn you that adding too many clauses will only complicate things. Sellers will usually favor offers with fewer contingencies because it makes it seem like more of a “sure thing” to them, and they don’t want to take their home off the market for anything less.

While your real estate agent cannot reveal what other offers may have been placed on the home, they can walk you through what standard practice is in the current market, and help you evaluate the property to determine which contingencies are most important to protecting your finances.

What do I have to pay after placing an offer?

Let’s say that your offer is accepted and you pay earnest money into escrow. From there, you’re going to have a few more small expenses that pop up. These expenses are generally within your control, and you may be able to forego some of them, like a home inspection. With that said, these costs generally are only here to protect and benefit you, not the seller.

One of the next key expenses is a home inspection. Inspectors can be hard to find as they’re usually in high demand. Ask your real estate agent for recommendations because you want a professional who is experienced and unbiased (i.e., not friends with the seller).

Another cost you will incur is the title search. This process comes with a small fee. If the title comes up clean, it’s time to close on your mortgage loan, which means putting down the largest sum of money: The down payment and closing costs.

What is a down payment?

Your down payment will be due at the time of closing and it is over and above the “closing costs” that you will need to pay. Closing costs generally equal 3% to 6% of the sale price of the home and help to cover things like the real estate agent fees, escrow services, and so on.

Your down payment, on the other hand, is between you and your lender. Your mortgage lender will expect anywhere from 0% to 30% down, depending on the program you chose. For instance, the USDA has income limits but offers zero-down programs for qualifying areas, while the FHA offers 3.5%-down programs for qualifying buyers.

Other programs, like those through Veterans Affairs, can help you minimize how much money you have to put down. However, putting more down up-front will save you money in the long run. Just think of it this way: Every dollar you put down towards the home is one less dollar you have to pay interest on for the next 15-30 years.

Here are some other things you should note about your down payment:

  • There are many state and federal down payment assistance programs that do not require repayment. A knowledgeable loan officer can help you determine if you are eligible for any of these programs and, if you are, they can explain the application process to you. Call Capital Bank Home Loans at 844-954-1786 and an experienced loan officer will assist you in exploring your options for downpayment assistance.
  • You may be able to use gifted funds to cover the down payment, or a portion of the down payment but there are stringent requirements. Lenders want to be sure that you can show them where any money and who it comes from and prove that it is not a loan.
  • Some programs allow you to take out a second mortgage to finance your down payment and/or closing costs. You should try to avoid this when possible because it means you’ll have very little equity in your home to start with, but it may be an avenue worth considering.
  • You can pay more than the minimum required down payment, and it’s generally advisable to do so. By paying more up-front, you’ll save money on interest in the long run. You could also potentially negotiate a lower interest rate because you’re lowering the lender’s risk.

There’s no doubt that down payments can be expensive and, if you’re trying to cover moving costs and other fees out-of-pocket, it can be hard to think about finding extra money to put down more. Fortunately, there are plenty of options available to you. The right lender will walk you through all of them.

Earnest Money vs. Down Payment

Now you know the difference between earnest money vs down payment requirements: Earnest money is paid at the time you place an offer on the home, and you may be able to get it back if you back out of the deal. Your down payment is due at the time of closing and is the amount of money the lender requires to be paid from your own funds.  The down payment is paid to the seller.

Some state and federal programs could provide a grant or financing for your down payment and/or closing costs. A partner like Capital Bank Home Loans can help walk you through your options.

If you’re interested in learning more about how Capital Bank Home Loans can help you on your home buying journey, reach out to our friendly team of experts today to learn more. Call Capital Bank Home Loans at 844-954-1786 to speak with a knowledgeable, friendly loan officer to get started!