Earnest Money Down Payment And Closing Costs Are Not The Same Thing

Dated: 06/24/2019

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Purchasing a home will have some fees upfront.  There is earnest money, the money you pay when your offer is accepted.  There is down payment, which is what the lender requires you to invest towards your home loan. And then last one is closing costs, which are the fees associated with processing the loan and your upfront escrows.

How much earnest money do you need?

Generally you can expect to pay around 1% of the purchase price of the home towards earnest money, but the percentage can increase depending on the market and other variables.  The term “liquidated damages” means that the seller gets to keep the earnest money if you don’t follow through. It cancels the agreement and limits the amount the seller can get from you for bailing out. For this reason, higher earnest money deposits are safer for sellers, while lower deposits are less risky for buyers.

Most contracts will have an option period that allows you to cancel the contract for any reason and not lost your earnest money.  There is a small fee to have the option.  Most option periods are 7-10 days.  You can expect to pay around $100-200 for this option.  The fee is lost if you choose to cancel within the option period.

A credit will be issued at closing for the amount of your earnest money (and usually option money), so it will go towards your down payment and/or closing costs.


What are closing costs and when are these due?

Closing costs are expenses related to making a loan and closing the purchase.

They include attorney fees, title fees, survey fees, transfer fees and transfer taxes. They also include loan origination fees, appraisal fees, document preparation fees, and title insurance.

Closing costs can range between 2 and 5 percent of the purchase price.  Buyers may have their agent negotiate with the seller for contributions towards some or all of the closing costs.

Closing costs are due when you sign your final loan documents. You will most likely wire the funds to escrow that day, or bring a cashier’s check. Personal checks will probably not be accepted.


How much down payment do you need for a house?

The down payment amount you must pay depends on the loan you get. Fannie Mae and Freddie Mac offer loans with down payment requirements as low as 3 percent. In general, the less you put down, the pickier conventional (non-government) lenders become about the rest of your credit and income.

The lower your down payment, the riskier the bank considers your loan.  You have a greater risk of default when you have less of your own money invested. Because of this risk, buyers are usually required to pay private mortgage insurance (PMI) if the down payment is below 20 percent.

There’s good news: three types of loans require little-to-no down payment:

  1. Federal Housing Administration (FHA) loan (minimum 3.5 percent)

  2. Veterans Administration (VA) loan (minimum zero percent)

  3. United States Department of Agriculture (USDA) loan (minimum zero percent

If you need help navigating through the process of obtaining preapproval, finding a home and what to do next, call me! I would love to help you!

Miranda Melchor

Realtor

Cell: (832) 404-5592

RE/MAX American Dream


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