Home Buying 101: EARNEST MONEY DEPOSIT VS. DOWN PAYMENT

When buying a home, it’s no surprise that you are expected to have funds available to be paid at certain points in a transaction. Two examples of necessary funds are:

1. Earnest Money Deposit, and

2. The down Payment.

When you make an offer on a home, the seller will often expect you to hand over a good faith deposit, also known as Earnest Money deposit. This shouldn’t be confused with a down payment, which is required at closing. In a financial context, a “deposit” is an advanced payment that goes toward the overall purchase price. This is how it works in real estate as well. When home buyers in California make an earnest money deposit, they are essentially prepaying some of the purchase price prior to completing the sale.

The funds provided by the buyer are usually held in an escrow account that’s managed by a title company or real estate agent. As the transaction moves forward, the deposited amount is then applied to the buyer’s down payment at closing (or other cost associated with the purchase). This is typically how it works.

You can get a better understand of how earnest money deposits work by reviewing the California Residential Purchase Agreement. This is the standard document used for home purchases in the state of California. Under section 3 of this document, we find some fill-in-the-blank portions that relate to the buyer’s “initial deposit,” which is the earnest money.

Earnest money and down payments differ in many ways but still make up a large expense when you purchase a home. Both of these costs involve paying a percentage of the purchase price of the home, so you’ll want to be aware of what these terms really mean.

Earnest money can affect how the seller looks at your offer and it can be at risk if something goes wrong during your purchase. Down payments can affect the amount of interest you will pay on your mortgage and the other expenses that are involved when getting a home loan.

The DaRosa Team takes you through everything you need to understand about earnest money and down payments. This will leave you better prepared for these costs during the home-buying process!

Call us at 916-884-6452 for more information!