What’s the Difference Between Earnest Money Deposit and Down Payment?


As exciting as it can be, buying a home can also be a long, expensive, frustrating process. One of the most difficult aspects, especially for many first time buyers, is understanding all the costs and fees that go along with the purchase. Aside from the many inspection fees, insurance and property tax payments, and even notary costs, there are the new and sometimes confusing terms that real estate agents and banks like to throw around. For example, while most buyers are familiar with the concept of a down payment, far fewer have ever heard of an earnest money deposit. So what is it, and why is it important?

What is an Earnest Money Deposit?

Essentially, when it comes time to make an offer, the seller wants to know that the buyer means business. The earnest money deposit is a pre-paid portion of the down payment, usually around 1-2%, that the seller gets to keep if the buyer decides to pull out of the deal without a sufficiently good reason. This money is presented along with the buyer’s offer, and is then kept in escrow until it’s time to close on the house. At that point, it gets paid towards the down payment. So while it eventually becomes part of the down payment, up until it is time to close on the house it is held separately and, most importantly, is potentially forfeit.

How is this Fair?

Well, sellers want to know that buyers have some skin in the game. Otherwise, they could pull out at the last minute if they have a change of heart or find a more desirable property. Earnest money deposits punishes that kind of indecision and provides an incentive for buyers to bid fairly.

Of course, there ARE ways to get that earnest money back. If financing falls through, or if the home inspection reveals previously undisclosed flaws, the buyer is entitled to get their earnest money deposit back. Buyers should make sure their agents go over all possible contingencies with them. If the deal falls apart due to the seller or other outside forces, the buyer will not be on the hook.

Contact Our Wilmington NC Home Builders, Trusst Builder Group

Still have questions? Trusst Builder Group, one of the leading Wilmington NC home builders, is happy to schedule a consultation. We’d like to help build the home of your dreams. We’ll make sure you have all the information you need to make an informed decision.