Earnest money, also known as a good faith deposit, is money that home buyers put down to demonstrate their serious intent when making an offer on a house. This deposit is considered part of the down payment and can definitely go towards funding the down payment. Here’s what home buyers need to know about how earnest money works with the down payment.
Does Earnest Money Go Towards Your Down Payment?
Earnest money, which acts as a security deposit in home purchases, usually contributes to the down payment. If a transaction proceeds as planned, this upfront sum is deducted from the total down payment due at closing. However, if a deal falls through for unallowable reasons, the seller may retain these funds. If the buyer backs out pursuant to a valid contract contingency, however, the money will be refunded.
Typically, in most home purchases, the earnest money deposit goes toward the down payment if the deal closes.
For example, if you offer $5,000 in earnest money when making an offer on a $300,000 home, and the seller accepts your offer, that $5,000 will be subtracted from the total down payment you need to deliver at closing.
If you are required to put down 20% on the $300,000 home, your total down payment would be $60,000. But since you already paid $5,000 in earnest money, you’d only need to bring $55,000 more to closing to fund the full 20% down payment.
The earnest money provides a portion of the buyer’s down payment upfront. This guarantees the seller that some of the funds are already set aside for the transaction. It also means buyers don’t have to come up with the entire down payment amount right before closing.
What is Earnest Money?
When you make an offer on a home, you typically include a monetary deposit known as earnest money along with your offer letter and proposed purchase price. This deposit shows the seller that you are serious about purchasing the home. It also provides the seller with some financial protection in case the buyer backs out of the deal for reasons not stipulated in the purchase agreement.
If the buyer backs out for a reason not specified in the purchase agreement, the seller typically gets to keep the earnest money as compensation for taking the home off the market.
However, if the deal falls through due to a reason allowed for in the purchase agreement, like the home failing inspection, the buyer is entitled to get the earnest money deposit back.
Buyers can lose their earnest money if they back out of a deal without cause. In this case, the earnest money goes to the seller rather than toward the buyer’s down payment.
Talk to Your Real Estate Agent
The specifics of how earnest money works with your down payment will depend on your purchase agreement terms, mortgage requirements, and more. Be sure to discuss how the earnest money deposit will be applied with your real estate agent before submitting an offer.
Having a clear understanding of earnest money deposits can prevent confusion about what funds you actually need to close on the home. Just remember that in most cases, the earnest money does go toward the total down payment due at closing. This deposit makes the home-buying process smoother by securing funds upfront and demonstrating the buyer’s serious intent and financial capability to the seller.