What is the Difference Between Down Payment vs. Earnest Money Deposit?

Although the two terms are similar, an earnest money deposit functions as a promise to the seller, while a down payment is a promise to the lender providing your mortgage loan. The earnest money you put up when buying a home can be applied to either the down payment or the closing costs.

When purchasing a home, the earnest money deposit may be used to make the offer more “enticing” to the seller by showing a higher level of interest. If the buyer’s offer is accepted by the seller, the earnest money is then placed in an escrow account by a third party and held until the closing date. Similarly, the down payment is the cash payment the buyer puts down on the home purchase. The rest of the purchase price is financed through the lender. Generally, the higher the earnest money or down payment, the lower the amount loaned by the lender.

How Are Earnest Money and Down Payment Affected if the Deal Falls Through?

You’ll want to consult with your agent regarding the amount of earnest money you’ll put down when making an offer. It’s important to note that earnest money is refundable as long as the buyer follows the agreed upon contract. However, if a buyer breaks the contract without cause, they would be open to losing their earnest money deposit to the seller. 

The Bottom Line

The earnest money can be considered into the down payment of the home. At the closing table, the earnest money is applied toward the down payment and overall closing costs. When making an offer, be aware of the conditions and what happens to the earnest money deposit in the event the deal doesn’t take place.

Considerations: Article has been modified and adapted from Nerdwallet.com, Rocket Mortgage, Zillow, and Investopedia.