What is the difference between the ‘down payment‘ and earnest money (sometimes referred to as EM or EMD – earnest money deposit) and when they are owed?
Your EARNEST MONEY is a good faith deposit that is held in an escrow account to demonstrate to a seller your commitment to finalize the deal, and how much ‘skin in the game’ you have. This EM is due often within 3-5 days of signing the Purchase and Sale Agreement (P&S or PSA) or Asset Purchase Agreement (APA).
Ultimately, unless you terminate the contract, and as long as you only terminate on the basis of one of your contract contingencies, you will not forfeit your deposit. You only risk forfeiture if you terminate once you have satisfied/met and waived contingencies. So for example, if your contract includes an inspection contingency and financing contingency, and inspection was fine, so you satisfied/met that (and therefore further waive the contingency going forward), and let’s say appraisal is good and accepted by the bank, (therefore that contingency is further waived), you decide to terminate? You would lose your EM. So you can see why a seller wants to know you have a substantial enough earnest money deposit that would deter you from terminating after contingencies are met. If you have $5,000 it might be easier to walk away than if you had $100,000!
How much is an EM on average (and know that this is also negotiable)? Generally speaking, we often see 1-2% of the purchase price. Further, a buyer can opt to make a first EMD within the few days of signing the agreement, and may make a second EMD once contingencies are satisfied. You can speak to your agent about this.
A DOWN PAYMENT is actually is the amount of money you pay directly to a seller at closing. Let’s say you are putting down $100,000 on a $500,000 purchase, the $100,000 goes to the seller, not to a lender, at closing. The balance of $400,000 comes from the mortgage. The closing statement will show the seller column and buyer column and how all money is applied, and what money is due from each side for the various closing costs.
So the only money that exchanges hands prior to closing is the EM.
