What’s The Difference Between Earnest Money Deposit and Down Payment?
Earnest money deposit (EMD) is the amount of money the seller has REQUESTED as a deposit to agree to sell you their house. Consider it a sign of good faith that you, the buyer, will go through with the purchase once you initiate the offer. Remember, by agreeing to your offer the seller has severely limited their ability to market their house for sale during the time you requested to close the transaction.
The EMD REQUESTED is always listed on the Multiple Listing Sheet (ask your realtor to see it). I capitalized requested to highlight the fact that EMD amounts are not set in stone. Almost everything is negotiable in this transaction and EMD is no exception. Offering to small an EMD can paint you as an insincere buyer. It also may cause you to lose the purchase to a competing offer with a higher EMD. Conversely, I always advise my clients not to offer any more of an EMD then is requested from the seller. Why risk a penny more of your money then you have to? If you ever have to default (breach the contract without an acceptable reason) you could lose your EMD.
Always make sure you have the money in the bank before you submit a check with your offer. The EMD will be turned over to the title company (usually within one day of acceptance of your offer) and they will cash it shortly thereafter. They place the money in a trust account until it comes time to close the transaction or until it is requested by either the buyer/seller. An interesting side note, even veterans (doing a dollar down VA loan) have to put down an EMD. The same rules mentioned above apply to veterans as well (though they have slightly greater protections in regards to potentially losing their EMD).
The down payment is the amount of money the LENDER requires that the buyer put into the purchase of the property. For example, on an FHA backed mortgage the lender requires that the buyer put down 3.5% of the purchase price. In return, the lender agrees to finance 96.5% of the purchase price for the buyer. The seller DOES NOT dictate what the down payment requirement is.
If the EMD is more then the required down payment, then the extra money can be used for other things. It can be used to pay for closing costs (including buying down the interest rate) or it can be partially refunded at close of escrow. Another important difference between EMD and down payment is the time in which the two types of funds most be committed. EMD most be submitted with the offer and down payment is usually required at close of escrow (at the end of the transaction).