The Difference Between Earnest Money and a Down Payment

If you’re new to the homebuying process, terms like earnest money and down payment can be confusing. While both involve money you put toward purchasing a home, they serve very different purposes. Understanding the difference will help you feel more confident when making an offer and preparing for closing.

1. What Is Earnest Money?

Earnest money is often called a “good faith deposit.” It shows the seller you’re serious about buying their home.

• When it’s paid: Usually submitted with your offer or shortly after it’s accepted.

• Typical amount: Often 1–3% of the purchase price (but varies by market).

• Where it goes: Held in escrow until closing.

• Refundable? Yes — in most cases, if contingencies (like financing or inspection) aren’t met, you can get your earnest money back. If you back out for reasons not covered in the contract, the seller may keep it.

2. What Is a Down Payment?

The down payment is the portion of the home’s purchase price you pay upfront at closing.

• When it’s paid: At closing, as part of finalizing your loan.

• Typical amount: Can range from as little as 3% (for some loans) to 20% or more, depending on the loan type.

• Where it goes: Directly applied to the home’s purchase price.

• Refundable? No — it becomes part of your ownership stake in the property.

3. How They Work Together

Think of earnest money as the promise and the down payment as the commitment. Earnest money holds your spot and shows intent, while the down payment secures financing and finalizes ownership.

4. Why the Distinction Matters

• Budgeting: Buyers should plan for both, along with closing costs.

• Negotiations: Strong earnest money can make your offer more appealing in a competitive market.

• Financing: The down payment affects your loan terms, monthly payments, and whether you’ll need mortgage insurance.

✅ Takeaway: Earnest money and a down payment may both involve upfront costs, but they serve different purposes in the homebuying journey. Earnest money secures your offer, while the down payment seals the deal. Knowing the difference helps you budget wisely and approach your purchase with confidence.