Tuesday, August 22, 2017

The Difference between Earnest Deposit and Down Payment

If you didn’t know the difference between these two or what these terms mean, now you will! Earnest deposit and down payment are two terms that we felt could use some clarification, so we’ve provided some detail on each.

What is an Earnest Deposit? 

The earnest deposit is the amount of money a buyer pays after a seller accepts their offer on a property or home. Although earnest deposits have become the norm in Minnesota when making offers on real estate, it is not a requirement. Legally, a purchase agreement is sufficient for the transaction.

An earnest deposit has often been thought of as a 'good faith' deposit and acts as a buyer's confirmation that they are serious in purchasing the property. If the real estate transaction falls through, it is possible the buyer will forfeit the earnest deposit. However, there are limitations by statute as to when the earnest money can be released by the listing broker, so the seller rarely receives the earnest money after a failed transaction.

Typically, earnest deposits are given to the listing broker by personal check, however there are other acceptable forms of payment including cash or electronic deposit.


What is a Down Payment?

A down payment is simply the difference between a home’s purchase price and the amount of the mortgage against the property. The down payment must be paid upfront before the home purchase can close. A down payment is the amount of money a buyer pays directly to the seller. It does not go to the lender, however, the amount of down payment is determined by the lender, depending on the total loan amount and the type of loan, however it does not go to the lender. The down payment is paid at closing, typically in the form of a cashier’s check. It can come from a bank account, gift from a relative or friend, or from the sale of a previous home.

Lenders always determine the down payment requirement because it depends on the type of mortgage the home buyer chooses.

This is not a full list, but it is the most common mortgage down payment options available:

  • 0% down payment: VA home loans for veterans and USDA Rural Housing loans
  • 3% down payment: MyCommunityMortgage (Fannie Mae) and Home Possible (Freddie Mac) programs for first-time buyers.
  • 5% down payment: Conventional loans (non-government) with private mortgage insurance or FHA home loans with credit scores of 580 or higher
  • 10% down payment: FHA home loans with credit scores of 500-579
  • 20% down payment: Conventional mortgage without private mortgage insurance

Real estate experts recommend 20 percent, but many people are not able to part with that amount of cash up front. Keep in mind, a higher down payment will offset the monthly cost a bit and allows for no private mortgage insurance (PMI). The one caveat to a lower percent down payment is PMI, but that is temporary and can usually be taken off within 5 years of purchasing your home. The PMI is there to protect lenders from losing money if a homeowner defaults on their mortgage.

We hope this helps clarify these two terms and if you have more questions about what we discussed above, please feel free to email Up North Properties at sales@upnorthproperties.com or call us at 218-820-7355.