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How is earnest money different from a down payment?

On Behalf of | Jan 20, 2022 | Residential Real Estate |

Putting together enough resources to be a competitive buyer can be a big part of buying a home.  Although having 20% of the purchase price for your home as a down payment is no longer necessary, people still need to have thousands of dollars available as a down payment when financing a home.  They also often need to have thousands of dollars available in earnest money when they make an offer on a property.

What is the difference between earnest money and a down payment? 

Earnest money is an incentive for the seller to take your offer

In a hot market, sellers often need to choose from several offers on a property that they want to sell.  Prospective buyers may offer different terms and different prices.  Some of them may be more likely to follow through with a purchase than others. 

Earnest money is a deposit made to show a seller that buyers fully intend to follow through with a purchase.  It is money that they deposit with their real estate agent and will not have control over after they make their offer.  Buyers can potentially lose their earnest money if they back out of a transaction without the right contractual protections. 

Technically, your earnest money is actually part of your down payment on the property.  It isn’t an extra expense that you pay in addition to the purchase price and closing costs.  However, the down payment only comes out of your account at closing in most cases, while the earnest money is at risk as soon as you submit an offer. 

Understanding the financing requirements and rules when buying a house will make this major purchase less risky and overall easier to complete.


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