Question 1

Does earnest money go toward the down payment?

Accepted Answer

Earnest money is kept in the escrow account until closing. At that time, it will be applied to the down payment or closing costs. Consult with your agent or attorney to ensure you understand how earnest money is disbursed at closing.

Question 2

Earnest money vs. due diligence fee: What's the difference?

Accepted Answer

Earnest money is a refundable deposit that serves as collateral to enforce the terms of the contract. If the buyer violates the contract, they lose that money. If the deal goes through, it goes toward their down payment and/or closing costs. Earnest money deposits are usually between 1-2% of the home’s purchase price, but can be much higher in more competitive situations. The due diligence fee, on the other hand, protects the seller in case you back out of the deal for a protected (or non-protected) reason as a result of inspection reports or other information gained during the due diligence period. This way, the seller gets something (the due diligence fee) even if you are able to legally recoup your earnest money. The due diligence fee is only refundable if the seller backs out of the deal. Due diligence fees aren’t mandatory, or even allowed, in every market. And if you’re waiving any due diligence contingencies or paying cash and buying as is, it obviously won’t apply. But if applicable, the due diligence fee is typically in addition to the earnest money deposit. The typical due diligence fee is between $500-$2,000, although it can be much lower. Like earnest money, the due diligence fee is negotiable and credited to the down payment or closing costs if the deal goes through. Your agent will be able to let you know if a due diligence fee might apply in your situation.

Question 3

Earnest money vs. down payment: What's the difference?

Accepted Answer

Earnest money and down payments are both cash you have to pay out of pocket. But they happen at different times, serve different purposes, and go to different parties in the real estate transaction. Earnest money is paid up front and serves as collateral for the seller to enforce the terms of the contract with the buyer (i.e., if the buyer breaks the contract, they are penalized by losing that deposit). The down payment is what you agree to pay the lender at closing, per the terms of your loan. This payment and other provisions of the loan — like how much you can put down on the house, monthly payments, and interest rate — are arranged with the lender during the loan pre-approval process. Usually, if you end up purchasing the home, earnest money will be applied toward your down payment – but the two are distinct and don’t necessarily interact.

Question 4

Who keeps earnest money?

Accepted Answer

The terms of the purchase agreement determine which party keeps the earnest money: If a buyer exits the deal for a reason protected in the purchase agreement, the earnest money is typically returned to the buyer. If the buyer backs out of the deal for reasons not protected, the seller keeps the money. If the deal closes, the earnest money goes toward the down payment or closing costs.

Darrell Davis

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