What is the Difference between Earnest Money and a Down Payment?
When buying a home, many have no idea what role earnest money plays in a real estate transaction. The earnest money payment forms part of almost all real estate contracts and agreements. It is a payment that you make to the Listing brokerage in good faith to show your sincere interest in the purchase of the property. The idea is to show you are serious about buying the property. The money will be held in an escrow account.
If this is the first time you are purchasing a home, it may seem like you are handing over money and getting nothing in return. That, however, is not the case. Once the earnest payment has been received, the listing agency r will announce the property is Under Contract, and the earnest payment will go towards the cost of the home. It forms the financial cement indicating you’re a sincere home buyer.
Does it always work out that way? No, it doesn’t, and since the earnest payment can be rather large, it is a good idea to understand what can go wrong before you hand over the cash.
It is also vital not to confuse a down payment with an earnest money deposit. A house down payment and earnest money are not the same things.
In the simplest form, the earnest money deposit is the promise to the Seller of the property and a down payment is the promise to the lender.