The Difference Between Earnest Money and a Down Payment

When you’re buying a home, you’ll hear two terms that sound similar but serve very different purposes: earnest money and down payment. Both involve putting cash upfront, but they come at different stages of the process and protect different interests. Understanding the difference helps you avoid confusion and plan your finances wisely.

What Is Earnest Money?

Earnest money—sometimes called a good faith deposit—is money you put down when making an offer on a home. It shows the seller you’re serious about buying. Typically ranging from 1–3% of the purchase price, it’s held in an escrow account until closing.

• Purpose: Protects the seller by ensuring buyers don’t back out without reason.

• Refundability: Usually refundable if you withdraw during allowed contingencies (like financing or inspection). Forfeited if you back out without cause.

• Applied to Purchase: At closing, it’s typically applied toward your down payment or closing costs.

What Is a Down Payment?

The down payment is a percentage of the home’s purchase price that you pay upfront at closing. It reduces the amount you borrow from your lender. Common down payments are 3–20%, depending on the type of loan and your financial situation.

• Purpose: Reduces your loan balance and shows lenders you have financial commitment.

• Refundability: Non-refundable—this is part of the actual cost of buying the home.

• Impact: The larger your down payment, the smaller your monthly mortgage payments and the less interest you pay over time.

Key Differences at a Glance

• Timing: Earnest money is paid when you make an offer; the down payment is due at closing.

• Function: Earnest money secures your offer; the down payment secures your loan.

• Risk: Earnest money can be refundable under contingencies; the down payment is never refundable.

Final Thoughts

Think of earnest money as a promise and the down payment as a commitment. Together, they show both the seller and the lender that you’re serious about the purchase. Planning ahead for both ensures a smoother path to homeownership.