Being a newbie while dealing with property purchases can be risky. So if you foresee that you will be purchasing a home shortly, you must know the ins and outs. Industry terms related to purchasing can be tricky to remember. Here’s everything you need to know as a new buyer.
You might have heard the terms “earnest money” and “down payment” while dealing with property. This standard industry jargon can be confusing.
Earnest money is the amount you pay as a token when promising a house seller that you are going to purchase. However, the down payment is the amount you pay to the money lender while buying a home through a mortgage. Since these are pretty different from each other, let’s get to know them in detail.
What is Earnest Money?
You might see different houses before purchasing a home and meet with their sellers too. But you decide to buy only one. Thus, to declare that you will buy a house, you pay token money that stops the seller from dealing with other potential buyers. So, this payment is called earnest money.
The usual limit of earnest money is 5 percent of the total sale price of a property. However, these deals can’t take place between buyer and seller unless a third party is involved. This third party can be anyone, including the seller’s lawyer, broker, escrow agent, or title company.
Usually, these money transactions take place with the help of an escrow agent. He is the one who keeps the earnest money unless the deal is finalized legally between the two parties. After that, he transfers the money to the one who is entitled to the property.
You might be thinking, if you back out of a deal after paying the earnest money, will you get a refund? It depends. It is refundable if you break the deal without going against any of the clauses in your contract. However, you will lose your earnest money if you break the contract against the law. The seller will keep the earnest money.
What is a Down Payment?
You must pay the down payment whenever you get involved with a lender to finance your property purchase. It is the amount you wish to pay as the initial payment, while your lender will pay the rest. However, how much you can pay as a down payment is not fixed as it depends on your affordability and purchase prices.
It depends on the terms and conditions of your loan and various other aspects like your ability to finance. That’s why, before purchasing a house via mortgaging, ensure you know how much you can pay as a down payment.
Your Mortgage Loan Type Dictates Minimum Down Payment Amounts
Here are the prerequisites you must meet while paying a down payment to buy a house.
Conventional Loan
Lenders usually demand at least 3% of the total purchase value as a down payment. However, you can offer as much as your affordability and convenience allow.
Most people prefer it to be at least 20% because they can be free from private mortgage insurance (PMI). That’s why it is a common practice among mortgage home purchasers.
FHA Loans
FHA loans can be a convenient option as they ask for only a 3% down payment. Still, it can be difficult from the aspect of monthly installment. The lower down payment adds the mortgage insurance premium to the deal and increases the amount of your monthly installment.
VA Loans
These loans are specially for military workers and don’t require any down payment. It is an attractive loan service for military purchasers as it excludes the need for a down payment.
Is Earnest Money Part of the Down Payment?
Yes, it can be. The earnest money you pay to initiate the deal with a seller can be used as down money and losing money because it is part of the payment you make to purchase a house. However, it is not part of the down payment. For instance, say the property costs $600,000, and you have submitted 5% of it as earnest money, so you have $30,000 in escrow. Moreover, your down payment is 10%. Therefore, you will have to pay more than $30,000 and make it equal to 10% of the purchase value.
Don’t forget to keep some money on hand for expenses like broker fees, appraisals, and lawyer’s payments. You have to cover these expenses with the down payment. Your lender will pay the rest. However, you will be paying them in installments later.
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