Many buyers get use the terms “Deposit” and “Down Payment” interchangeably, but the two are very different, and confusing them can cause problems.
The Down Payment on a real estate purchase is the difference between the purchase price, and the amount of any loans that you might be taking out to finance the purchase. If you are purchasing a $400k property, for example, and taking out a $320k loan, then you are “putting down” $80k of your own money on the purchase–that $80k is your down payment. Most purchasers in the current market in this area tend to make down payments of between 3.5% and 20% of the purchase price, with a few putting down 0% (there are still a few zero-down options available) and others putting down more than 20%.
The Deposit (also known as the “Earnest Money Deposit” (or “EMD”) or just the “Earnest Money”) is an amount of money that, as part of your offer on a property, you are agreeing to put into escrow–basically, to hand it over to a trusted third party–as an assurance to the seller that you are not going to waste their time with an offer than you don’t intend in good faith to follow through on. If the seller accepts your offer, then your deposit money is held by that third party until the day of settlement, at which point it is given to the seller and credited towards whatever amount you would otherwise have to pay at settlement (i.e. your down payment plus any closing costs or lender prepayments); if the contract doesn’t go to settlement through no fault of the buyer, then the deposit is often (but NOT always) returned to the buyer. (Your agent can explain to you the circumstances when a deposit would or wouldn’t be returned to you, and of course those circumstances are also spelled out in the 20+ pages of contract that you usually sign in this area as part of getting your offer accepted. (You are reading all of those contracts before signing them, right?)) Deposits in the DC area in the current market tend to range between $2k and $15k, but sometimes go much higher; the point of an earnest money deposit, after all, is to convince the seller that if they accept your offer, they will probably get their house sold, so the more money you are willing to put at stake in that deposit, the more convincing the deposit will be.
It’s important to not confuse Deposits with Down Payments, because doing so can really throw off the math for you or anyone working with you. If, for example, you tell your lender that you’re are only putting $5k down on a purchase, but are actually planning on offering a $5k deposit to the seller and putting down $40k as a down payment, your lender will probably end up putting you in completely the wrong loan product for your needs and costing you a lot of money in the long run. Confusion between Down Payments and Deposits can also result in nasty surprises at the settlement table and/or during negotiations with sellers, so make sure to use the right term for the right concept.
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