It does not matter if you are a first time home buyer or you have bought houses frequently, the terminology can get confusing. Everyone is talking about money, and everyone is talking about YOU giving THEM money! The lender is talking about points, interest rates, appraisal fees, escrow balances, monthly payments, and cash to close. The real estate agent is talking about inspection fees, down payments, and earnest money deposits.

What is the difference between Earnest Money and a Down Payment?

Earnest Money is kind of like a security deposit, it is meant to demonstrate that the buyer is serious and is in good faith planning to purchase the house. It's purpose is to make sure the buyer has some skin in the game. It puts pressure on the buye that r they can't just change their mind for no reason and walk away from the contract leaving the seller with a house that my have had repairs done at the buyer's request and a house that has not be on the market for the length of the home being under contract. At closing, the earnest money is put toward the buyer's down payment.  If the buyer changes their mind after the due diligence period, the buyer may not be able to get the earnest money refunded and the seller will be able to keep the earnest money as damages. Typically, if the seller terminates the transaction, the earnest money will be returned to the buyer. 

Down Payment is the amount of money a buyer puts towards the purchase of the house. 

  • If you buy a house for $200,000 and you put down 3%, you are putting $6,000 towards the purchase price and mortgaging $197,000.  A 20% down payment would state a buyer is putting $40,000 towards the purchase price and financing $160,000. 

Different types of loans require different down payments and rates may vary depending how much you put down. Here is an example from August Mortgage Company:


If a buyer puts down less than 20%, they are required to purchase mortgage insurance. There are two types of insurance: 

  • PMI--Private Mortgage Insurance--This is paid to an insurance company, normally on a monthly basis. 
  • FHA Insurance--this is paid to the Federal Government. A buyer with an FHA mortgage will pay an upfront fee plus monthly payments.

A qualified lender can explain the best type of loan for each buyer.

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