If you have been considering a home purchase, you most likely have come across the terms, earnest money and down payment. First time home buyers often ask the difference between these two terms. Michele Harmon Team wants to help you feel at ease throughout the home buying process, therefore, we have provided you with everything you need to know about the difference between a down payment and earnest money deposit!
What is Earnest Money?
According to Texas REALTORS®, “Earnest money is an amount agreed to in a Real Estate contract that you will pay soon after entering into a contract as a show of ‘good faith’ that you intend to purchase the property. If the deal closes, the earnest money is typically credited toward your down payment and other costs of buying the home.”
Earnest money helps you through a competitive bidding war. Sellers often favor these good faith deposits because they want to ensure the sale will not fall through.
Who Holds onto Earnest Money?
Earnest money is deposited with an escrow agent – an impartial third party such as a title company – who holds it until the transaction closes.
What Happens to Earnest Money When the Transaction Does Not Close?
If a transaction does not close, the terms of the contract determine who will receive the earnest money. For example, the earnest money is typically returned to the buyer if the buyer exercises the right to terminate during the option period. If you are buying a home, Michele Harmon Team wants to keep your earnest money protected. Most of the protections a buyer has in a Real Estate contract are based on the agreed upon contingencies, including:
- A Home Inspection Contingency
- An Appraisal Contingency
- A Mortgage Financing Contingency
- A Home Sale Contingency
What is a Down Payment?
According to bankrate.com, a home down payment is simply the part of a home’s purchase price you pay upfront, and it does not come from a mortgage lender via a loan. For example, if you want to buy a house for $100,000 and you put $3,000 toward the purchase price, you would take out a mortgage for the remaining $97,000.
Is Earnest Money a Part of the Down Payment?
Your earnest money deposit is applied to your down payment or closing costs.
The Bottom Line
If you are a buyer or seller, it is important to understand the difference between earnest money and a down payment. Michele Harmon Team’s goal is to be informative and helpful throughout the buying and selling process. If you are still feeling unclear about the differences, give us a call at 713-818-1330! We are always happy to help!