Earnest Money vs. Down Payment: What’s the Difference?

When buying a home, “earnest money” and “down payment” are two terms you’ll hear a lot early in the process. Because both involve paying money upfront, it’s easy to confuse them, especially if this is your first time buying a house.

However, they serve very different purposes:

• Earnest money is a good-faith deposit you submit shortly after your offer is accepted.
• A down payment is the larger amount you pay at closing toward the home purchase itself.

In this brief post, we’ll take a closer look at how they compare, when they’re paid, and how much you may need for each. We’ll also provide two calculators to help you plan ahead.

Save thousands when buying a home

HomeLight-recommended real estate agents are top-tier negotiators who understand the market data that helps you save as much as possible when buying your dream home.

Find a top buyer's agent

Earnest money vs. down payment at a glance

	Earnest money	Down payment
Purpose	Shows the seller you’re serious about buying	Reduces the amount you borrow from your lender
When it’s paid	Shortly after offer acceptance	At closing
Typical amount	Around 1%–3% of the purchase price	Often 3%–20% of the purchase price
Where the money goes	Held in an escrow account	Paid toward the home purchase
Refundable?	Sometimes, depending on contingencies and contract terms	Generally no, once the sale closes
Applied toward your costs?	Usually credited toward your down payment or closing costs	Paid directly toward the home purchase

What is earnest money?

Earnest money is the deposit you’ll submit after a seller accepts your offer on a home. It’s designed to show the seller that you are serious about moving forward with the purchase.

The money is typically held in an escrow account until closing. If the sale goes through, your earnest money is usually applied toward your down payment or closing costs.

The amount can vary depending on the market and purchase price, but buyers commonly put down around 1% to 3% of the home’s price as earnest money.

Your earnest money may be refundable if you back out for a reason covered by a contingency in your purchase agreement, such as financing or inspection issues. But if you walk away from the deal for a reason not protected by your contract, you could lose your deposit.

Want to estimate how much earnest money you may need? Use our calculator below.

What is a down payment?

A down payment is the portion of your home’s purchase price that you pay upfront at closing. The rest is typically financed through your mortgage loan.

For example, if you buy a $400,000 home with a 10% down payment, you would pay $40,000 upfront and finance the remaining amount through your lender.

The amount required depends on several factors, including:

• Your loan type
• Your credit score
• Your lender’s requirements
• Your qualifications as a buyer

Some loan programs allow qualified buyers to put down as little as 3%, especially certain conventional loans aimed at first-time or low- to moderate-income buyers. Others may require a larger down payment.

Whether required or not, a larger down payment can help reduce your monthly mortgage payments and may help you avoid private mortgage insurance (PMI) on conventional loans. PMI is an additional monthly fee that lenders charge if your down payment is less than 20%.

Use the calculator below to estimate what your down payment could look like based on different home prices and loan scenarios.

Does earnest money count toward the down payment?

In most home purchases, earnest money is credited toward your down payment or closing costs.

For example, let’s say:

• Your required down payment is $20,000
• You already paid $5,000 in earnest money after your offer was accepted

At closing, that $5,000 would typically be applied toward the total amount you owe, meaning you may only need to bring the remaining $15,000 for the down payment, plus any applicable closing costs.

from HomeLight Blog https://www.homelight.com/blog/buyer-earnest-money-vs-down-payment/