Hey, future homeowners! Today, we’re diving into the world of real estate lingo, and we’re tackling a topic that often causes confusion—earnest money vs. down payment. Stick around because, by the end of this video, you’ll be a pro at navigating these terms like a seasoned homebuyer.

My name is Nick Garcia, I’m a real estate agent with All City Real Estate serving Austin Texas and surrounding areas. 

So, you’ve decided to embark on the exciting journey of homeownership. Congrats! But before you get swept away in your house-hunting dreams, let’s unravel the mystery behind earnest money and down payments.

First things first, let’s talk about earnest money. What is an earnest money deposit?

An earnest money deposit, also known as an escrow deposit, is the cash a buyer puts into an escrow account when the seller accepts their offer. It’s a show of commitment, signaling that the buyer is serious about purchasing the home.

Think of it as a triple threat—it shows the buyer’s seriousness, indicates they have funds for the down payment or closing costs, and displays confidence in their ability to seal the deal.

Now, what is a Down Payment?

The down payment is a percentage of the purchase price that the buyer pays to the seller during closing. The rest of the purchase price is typically covered by the lender.

A higher down payment shows the seller you are ready willing and able to purchase their property. And if you really want a house, giving the seller and listing agent confidence is a good way to strengthen your offer.

Let’s clear up the any potential confusion. While both involve a percentage of the purchase price, earnest money goes into escrow when the offer is accepted, whereas the down payment together with your cash to close is paid during closing.

And here’s the crucial part—earnest money is at risk if the buyer doesn’t meet their obligations. Contingencies, like a home inspection clause, provide an escape route if significant issues arise.

In Texas, we use a timeframe called the “Termination Option or Option Period” Depending on the market, the amount of days is negotiable but typically the option period is between 5 to 10 days. 

If you terminate your contract AFTER your option period, your earnest money is at risk of going to the sellers. 

Now you’re probably wondering, How Much Earnest Money Will I Have to Pay?

Let’s talk numbers. Earnest money is typically around 1-2% of the offer price, but it can vary based on the real estate market and location.

For example, for a $500,000 property, you might be looking at putting $5,000 to $10,000 into the escrow account. This amount can be negotiated, so communication between your agent and lender is important.

And remember your Earnest money goes towards your final cash to close. 

So naturally the next question is : What Down Payment Do I Need to Save?

Moving on to down payments, traditionally 20% used to be the norm, but fear not! Times have changed, and you don’t need to break the bank. Many programs allow 3%-5% down payments. There are even some programs where you don’t have to give any money down!

Remember, lenders may request a higher down payment for better terms. With 20% down, you dodge private mortgage insurance, saving you money in the long run.

In a nutshell, buying a home involves expenses, including earnest money and down payments. Know your financial landscape before diving into homeownership—it’s a journey worth planning.

And there you have it, the lowdown on earnest money vs. down payment. If you found this helpful, give it a thumbs up, and don’t forget to subscribe for more real estate insights. Until next time, happy house hunting!

If you have questions or want to share your home buying experiences, drop them in the comments below. This is Nick, signing off—may your future home be as perfect as you imagine!