What Exactly is the Difference Between Earnest Money and Down Payment

What Exactly is the Difference Between Earnest
Money and Down Payment
You’ve researched mortgages, cleaned up your credit report, and meticulously saved for a down
payment. Now it seems there is something else you overlooked, and that is the need for earnest
money. What is this earnest money, what is its purpose, and how is it different from your down
payment? Read on to find out more.
What is Earnest Money?
Earnest money is a separate pot of money given to a seller once an offer is accepted. These funds
are used to show “good faith”-in other words that you are “earnest” about following through. The
money is placed into an escrow account, where it is held until closing. At that time, it may be
applied toward your down payment or closing costs. You may also receive your earnest money
back if it is not needed for other purposes.
How Much is Required?
There are no hard-and-fast rules that dictate how much earnest money is appropriate. Instead,
local markets tend to determine the amount. In many areas, earnest money is usually between
one and three percent of the home’s price, but in others it can be as much as five to ten percent.
Unlike earnest money, the amount of down payment that’s required is known up front. While
you may have some flexibility when it comes to earnest money, failing to have enough for your
down payment will almost certainly keep you from getting a loan.
Where does the Money Go?
The buyer’s agent is responsible for securing earnest money until closing. This money is never
turned over before then. Many times, earnest money is provided in the form of a cashier’s check,
and is often returned without ever being cashed.
A down payment on the other hand is provided directly to the seller and does not change hands
with a real estate agent at all. The rest of your purchase price is then covered by your mortgage.
Your lender will provide a check for the down payment amount to the seller at the time of your
closing.
Earnest Money may be Refundable
Your purchase agreement will spell out very specific terms for a home’s purchase. For example,
the sale will be contingent upon your ability to qualify for a loan or a satisfactory home
appraisal. If any of these conditions are not met, you are entitled to receive your earnest deposit
back. However, you will forfeit your rights to any earnest money if you fail to keep any part of
your agreement.

Down Payment Money is not Refundable
The amount of your down payment is determined when you apply for a loan, and no part of it is
refundable-even if you later decide you would like to put less money down. It is also not payable
until closing, although some lenders may put a freeze on your account to prevent you from
making withdrawals.
Although earnest money differs from a down payment, both are necessary if you are to obtain a
home loan. Once you understand the difference between the two, the idea of coming up with
earnest money will seem a lot less stressful.