The difference between earnest money and down payment when buying a home can be confusing. They both apply to the total cash needed to close on the home you are buying, but are due at different times. Usually earnest money is a deposit due at the beginning of the purchase process and down payment is the total due at closing, at the end of the process.
EARNEST MONEY
- Earnest money is cash from the buyer due at time of offer, demonstrating to the seller that the buyer is serious about purchasing this home
- Usually 1-3% of purchase price is expected, but there is no legally set amount
- Sometimes the seller sets a required amount, either % or dollar amount
- It is not unusual for a seller to require more earnest money with a cash offer to discourage the buyer from walking away
- Sometimes buyers offer a higher earnest money deposit in multiple offer situations to show how serious they are about the property
- In Minnesota, earnest money must be deposited within 3 days of coming to a signed, written agreement
- Usually held in listing broker’s trust account until closing
- May be paid by check
- In Minnesota, commonly paid electronically through TrustFunds
- This is NOT cash payable in addition to your down payment
- It usually applies to your down payment and closing costs at time of closing
- If your mortgage includes down payment assistance or is a zero down VA mortgage you could even get a refund at closing
- If there are contingences such as inspection, financing approval, or sale of another property and the agreement is canceled, earnest money is distributed based on the terms of the agreement
- Buyer usually gets earnest money back if the agreement is canceled due to the contingencies not being met
- If all contingencies are met but buyer cancels, seller typically keeps earnest money as liquidated damages
DOWN PAYMENT
- Down payment is cash from the buyer due at closing
- Purchase agreement states the down payment amount
- Usually 3% – 20% of purchase price
- Down payment and closing costs are payable by the buyer at closing
- If there is a mortgage, the balance due to complete the sale is financed and provided by the lender
- Lenders typically allow sellers to contribute up to 3% of the purchase price to help buyers cover closing costs
- Typically negotiated with the seller at time of purchase agreement
- Can also be negotiated to help defray the cost of fixing deficiencies discovered at the inspection
In the end, earnest money does not cost you more because it applies to the total cash you need at closing. But because it is due at the beginning of the transaction rather than the end it could be problematic if you don’t have much cash available at the time of your offer.
Both earnest money and down payment amounts can have an impact on how the seller receives your offer, especially in a multiple offer situation. Their concern is usually not only getting a good price, but also the assurance that there is sufficient cash and financial stability to get through closing.
Sharlene Hensrud, RE/MAX Results – shensrud@homesmsp.com
