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The Difference Between A Down Payment and an Earnest Money Deposit

If you are a first time home buyer or it's been a while since you bought a home, here is some information that might help:

How Much Should a Buyer Offer in Earnest Money? Typically, the deposit required by a buyer will be between 1% and 3% of the purchase price. I recommend 3% when the offer has competition. Otherwise, 2% works and the Seller might ask for a bump of 1% after release of contingencies.

What Happens to the Earnest Money Deposit? The title company will keep the funds in their escrow account. The earnest money will be accounted for at the time of the closing. At our brokerage, we don't handle any funds. All EMD's should be wired directly to escrow.

How Do Earnest Money and a Down Payment Differ? While both contribute to the purchase price of the house, the earnest money is security for the seller, while a down payment is money a buyer has to put towards the purchase price when they get a loan. The balance of a buyer’s funds for purchasing a house will come from the loan.

Is It Possible to Get an Earnest Money Deposit Back? There should be contingencies in the contract to allow for situations where the buyer can walk away with their deposit returned to them. Common contingencies would include finding problems with the house when it is inspected or the buyer failing to secure financing for the purchase price. If problems are found during the home inspection, the buyer can choose to cancel the offer, renegotiate the price, or have the seller rectify the problem before they proceed. If the buyer is not able to proceed with the sale because they cannot get the financing, they also would be able to get their earnest money returned.

Can You Lose Your Earnest Money Deposit? Yes so make sure to read and understand your contract. Here are the most common ways buyers can lose their deposit: They don’t respond in writing for extensions they have in the contract, such as a home inspection or financing. They get cold feet and just walk away from the sale. They find another property they like better and don’t proceed. They decided to put up a nonrefundable deposit to make their offer more attractive to the seller.

Source: Realtor Magazine, January 9, 2020

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