At Home With Lisa-What is the Difference Between Earnest Money Deposit and Down Payment?

When you buy or sell a home, you get used to hearing words you've never heard before.  Two rather vague but very important terms for buyer and seller alike are "earnest money deposit" and "down payment".  What's the difference?

Earnest money-also known as an escrow deposit- is a dollar amount buyers put into an escrow after the seller accepts their offer.  Buyers do this to show the seller that they're serious about buying the home.  Another way to think of earnest money is a "good faith" deposit that will compensate the seller if the buyer breaches the contract and fails to close.  If the deal goes as planned, then the earnest money is usually applied towards the buyers down payment.

How much is a typical earnest money deposit?  They usually range from 1% to 2% of the purchase price of the home.  If the home costs $300,000, a 1% earnest money deposit would be $3000.

Now, what is a down payment?

The down payment is the amount that the lender requires you to put towards the purchase of the property.  Normally based on a percentage of the total sales price, the amount is typically established early in the loan application process with your lender.  While down payment amounts can vary from loan type to loan type, normally the source of the money must be verified and approved by the lender.

So to recap....Earnest money deposit is offered to the seller to convince them you are committed to purchasing their home.  A down payment is the amount of money the buyer must produce for the lender to approve the loan for the home.

I'm Lisa Longest with Realty Navigator. I am a full time Realtor® in Anne Arundel and Queen Anne Counties. I am here for all your real estate needs. If you are looking to buy, sell or question me about the market in your area, feel free to contact me. My email is LisaLongest.RE@Gmail.com and cell is 443-786-4200.