What Is The Difference Between A Deposit And A Down Payment?

Many of the terms used by real estate professionals are confusing when you are buying a home for the first time. In my experience, two of the most confusing and misunderstood terms used are “deposit” and “down payment.” They both require cash from a buyer. So, you may ask, “What’s the difference?

The Earnest Money Deposit (AKA Good Faith Deposit or Escrow Deposit)

This deposit refers to the initial deposit that a buyer deposits into an escrow account as “consideration” to show a seller that they are serious about their offer. The money is part of the “offer contract” and when the offer is accepted then the money gets deposited into an escrow account that is usually managed by a third-party.

How Much Is Typical For The Earnest Money Deposit?

In Tallahassee, you often see the deposit range from $500 (for homes under $100,000) to 1% or 2% of purchase price. With new construction, the deposit required is often higher and is sometimes as much as 10% of purchase price. Additionally, a seller can reject accept or counter the offered earnest deposit amount listed in the offer contract, as it is one of the negotiable terms of the contract.

What Happens To The Earnest Money After You Write The Check?

Earnest money deposits are delivered within the agreed upon period of time that is stated in the offer contract. Some are delivered with the contract. Whereas, others are delivered within a certain amount of days after the contract is accepted. Your Realtor will know the number of days before your Earnest Money is due for delivery.

The Earnest Money check will most likely need to be written to the title company where the deposit is being held. The deposit will sit in the Earnest Account until closing. At which time, funds will be dispersed in the manner in which the buyer and seller have agreed upon. Generally, the buyer controls how the deposit is disbursed. It often is applied towards the down payment. But, occasionally, a buyer will receive all or part of the deposit back at closing.

Please note: The Earnest Money is refundable. All or part of the money may be returned to the buyer if the purchase falls through. There are stipulations though. Go through your contingencies with your Realtor and understand what your responsibilities are. Generally, if the buyers back out for any reason allowed by the contract or purchase agreement, then they are entitled to their earnest money deposit.

What Is A Down Payment?

A down payment is the amount of money applied towards the purchase price of a home that a buyer is not borrowing / financing. This amount varies depending upon the type of financing that the buyer is using and the lender’s or loan type’s requirements. However, you typically see a range of 3-20%.

Down payments can come from a buyer’s personal savings, the proceeds from a previous home sale, or be borrowed and they are usually paid by check at closing. The initial Earnest Money Deposit can also be applied towards the down payment.