Down Payments vs. Earnest Money

Down Payments vs. Earnest Money

Down payment and earnest money are sometimes confused but both are part of the homebuying settlement. Here, we will discuss both individually and their roles during the buying and selling process.


Down Payments

Perhaps the more well known of the two, a down payment is an amount of the total sales price that is due at the time of closing. This is often dictated by the type of loan the buyer is obtaining. A purchase with 0% down is possible with USDA and VA loans, and down payment assistance programs such as HomesFund in Durango offer even more options. The settlement statement is prepared by the title company based on the contract and delivered a few days prior to closing showing all of the debits and credits. This also finalizes the total amount needed to complete the purchase. 


What is The Ideal Down Payment Amount

While there is no industry standard, Forbes reports that 14.4% was the average down payment in 2023. There are multiple factors that determine what number is right for an individual buyer. This amount can be as low as 0% or as high as 100%, making it a cash purchase. Factors that weigh into the decided amount include high mortgage rates, a desire to reduce the monthly mortgage payments, no additional cash available, or gift funds contributed by another source.


Earnest Money

Earnest money is the initial amount the buyer pays for the purchase of a property. The amount is originally proposed by the sellers but is negotiable and can range from $1,000 to $100,000 and beyond. Typically for smaller purchases such as vacant land or starter homes, the amount is lower as compared to luxury properties or large farm and ranch parcels. These funds are held by the title company until closing and serve to ensure that the buyer is contractually bound and truly engaged in the transaction. This money is applied to the down payment at closing. If a contract terminates, the funds may be returned to the buyer in part, in whole, or not at all, depending upon the reason for termination and if the contract terms were followed . As a buyer, to best position yourself to receive your earnest money back in full is to adhere to all dates and deadlines including loan approval, inspection, and title.


While both down payment and earnest money are important pieces to purchasing a home, they serve different purposes. In order to best plan for a real estate transaction, please don’t hesitate to contact The Durango Team at The Wells Group for assistance and to answer any questions you may have about real estate contracts. 

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The Durango Team has decades of real estate experience in the Durango, Colorado area. Let us help you buy or sell your Southwest Colorado home.

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