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What’s The Difference Between Earnest Money & A Down Payment?

What Happens To The Earnest Money If The Deal Fails

Selling a house in Palm Harbor can be overwhelming, especially if this is your first time handling a significant real estate transaction. As a seller, your anxiety might shoot up through the roof, especially when your real estate agent or the buyer throws around real estate jargon that makes you feel lost.

Worry not, as this post looks at two crucial but slightly confusing terms you should know as a seller, especially if you’re hoping to sell a house fast in Palm Harbor and complete the deal quickly with zero hassles.

Both terms—down payment and earnest money—refer to cold, hard cash that exchanges hands during a home sale. But what’s the difference? Are they the same? Here’s a quick cheat sheet you can use to know the differences between earnest money and a down payment.

What Is Earnest Money?

Also known as an escrow deposit, the earnest money is an amount of money that a buyer will put into an escrow account after the seller accepts their offer. This demonstrates that the buyer is serious about the sale and wants to complete it successfully. Another reason sellers demand earnest money is to compensate for the damages/loss associated with a buyer backing out of the contract at the last minute.

The crux here is this: if the buyer backs out of the sale for any reason, the seller gets to keep the earnest money.

How Much Earnest Money Do Buyers Pay?

Generally, an earnest money deposit will be between 1% and 2% of a home’s selling price. However, it can go as high as 10% if there is massive demand for the property and several buyers are trying to outbid each other. And several other factors also play a role in determining how much earnest money is needed. Usually, cash home buyers in Palm Harbor, FL offer to pay a large check as earnest money to show a genuine interest. Then they close by paying the remaining balance in cash.

What Is A Down Payment?

The down payment is money the buyer pays directly to the seller. Despite the common misconception, a buyer does not pay the down payment to the lender. Instead, it goes to the seller. The remaining balance on the mortgage is paid by the buyer to the lender.     

The amount you use for a down payment can come from your savings, it can be a gift from a family member, or you can use the profit from the sale of a previous home. Generally, down payments are made via check on the closing date.

How Much Is Usually Put Down As A Down Payment?

How much is put down as a down payment largely depends on the lender’s terms and conditions. Generally, a mortgage lender will require a buyer to pay around 3% of the home’s price as a down payment, but real estate agents recommend putting down at least 20% of the selling price as a down payment.

Is The 20% Down Payment Mandatory?

There is a common misconception that a buyer has to cough up 20% of the selling price as a down payment to buy a house. For example, if the home is sold for $300,000, the 20% down payment comes to $60,000, which is a considerable sum, especially for young professionals and first-time home buyers. While some sellers are open to accepting less than 20%, others might not be so willing.

That said, if you’re selling your Palm Harbor home for cash, the cash home buyer (usually a real estate investor) will pay the entire sum out of pocket, so there’s no need to worry about getting a down payment.

Understanding the difference between escrow money and a down payment can help you negotiate real estate transactions confidently, and this information will help you sell a house fast in Palm Harbor, FL!

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