When do you pay closing costs, down payment, and earnest money?

August 31, 2022 - 7 min read

Paying earnest money, down payment, and closing costs

Buying a home usually occurs in stages. You’ll first provide an earnest money check to the escrow company, usually within three days of making an offer.

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On closing day, you’ll pay the down payment and closing costs and sign final loan documents. Your earlier earnest money deposit will typically be credited toward your down payment at this time.

In some cases, your mortgage requires no down payment, or the seller may pay some or all of your closing costs. But most buyers have to pay for these items out-of-pocket before getting the keys.

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Three upfront home buying costs

Most people buy a new home with a mortgage loan, especially first-time home buyers. But your mortgage doesn’t cover every part of the home buying transaction. Buyers need to pay for some costs upfront in cash. These include:

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  1. Earnest money
  2. Down payment
  3. Closing costs

It’s important to understand the differences between these items. It’s also crucial to know the deadlines for each. Knowing what to expect can help you better prepare for the home buying process. You may have to adjust your homeownership timetable to have enough money saved.

When do you pay earnest money?

“Your earnest money is typically due 3-5 days after your contract is signed,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO. “It will be explicitly stated in your contract when the earnest money is due.”

Many experts recommend that buyers attach an earnest money check to the offer right away, even if doing so isn’t required. It shows that you are serious and have the ability to close the deal. That’s why you should have available earnest money in your checking account before you start making offers on homes.

If you have the money and are really serious, you can just put up your entire down payment right there. In these instances, you’ll pay earnest money when you make an offer.

Once deposited, earnest deposit funds are often held in an escrow account until closing.

When do you pay the down payment?

“The down payment is typically paid at closing,” says Ailion. “The settlement agent or loan officer will combine these funds with lender funds to pay the seller the purchase price.”

Remember, too, that your earnest money is usually considered to be part of your down payment. So rather than receiving an earnest money refund on closing day, it will be subtracted from the amount you have to pay in cash.

When do you pay closing costs?

Closing costs are due on your closing day when you sign your final loan documents. You will most likely send the funds to your escrow agent that day via wire transfer or by bringing a certified check to closing. Personal checks will probably not be accepted.

What is earnest money?

Most home buyers are familiar with the down payment and closing costs required for a mortgage. But some are surprised at having to make an earnest money deposit when they put in an offer. You’ll need cash or easily liquidated funds ready for this purpose when you’re house hunting.

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Earnest money is an upfront good faith deposit to the seller that demonstrates the buyer’s commitment to the home purchase. Basically, it shows that you’re serious about the offer — because if you back out for a reason not covered in your purchase contract, you could lose the earnest money.

Earnest money “is a sign that you will honor the real estate purchase contract. Your earnest money deposit is good faith money that the seller keeps if you breach the contract,” says Bruce Ailion, a real estate attorney and Realtor with RE/MAX Town and Country in Atlanta.

How much earnest money do you need?

“Local customs influence the amount of earnest money a buyer needs,” says Ailon. “It can be as low as $500 to $2,000, or between 1% to 5% percent of the purchase price. Or it can be as high as 10 percent.”

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“The amount will also depend on the offer you presented to the seller, as sometimes buyers offer higher earnest money down to make the offer more appealing,” adds Meyer.

“Earnest money can be as low as $500 to $2,000, or between 1% to 5% percent of the purchase price. Or it can be as high as 10 percent.”

–Bruce Ailion, Realtor 

The bottom line is that the amount you’ll pay in earnest money is dependent on the purchase price. But rest assured, you’ll work out the earnest money ahead of time with your real estate agent. What’s more, your earnest money will eventually become part of your down payment and closing costs, generally at the closing table.

Is earnest money refundable?

“Should something arise that affects the purchase, earnest money is typically always refundable, assuming the buyer meets their timeframes and contingencies,” says Meyer.

For instance, if the house doesn’t appraise for the sales price, or the home inspection contingency reveals a costly flaw, then you can get your earnest money back. These agreed-on stipulations are called contingencies, and they are a buyer’s friend.

It can be risky to enter a purchase contract without adequate contingencies in place. Still, in very hot markets, many buyers forego safety nets like a financing contingency to make their offer more attractive.

  • Refundable earnest money must be returned to you if something goes wrong with the transaction that was addressed ahead of time in the contract
  • Non-refundable earnest money is just that — money you can’t get back for any reason if you can’t or don’t close

Do this with the greatest caution, and only after speaking to your real estate agent and getting a home inspection prior to making an offer. Contingencies or no, you’ll lose your earnest money if you simply change your mind about buying.

What is a down payment?

Claudienne Hibbert, president of the National Association of Real Estate Brokers South Florida Board, says a down payment is different from an earnest money deposit.

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A down payment is “the amount of the purchase price a buyer pays that’s not financed in a mortgage loan.” In other words, the down payment is a percentage of the home’s purchase price that you agree to pay in cash, out-of-pocket.

Together with the home loan, the down payment equals the total sales price for the home being purchased. If your home’s sales price is $250,000, and you’ll borrow $237,500, your required down payment is $12,500 (5%).

Ailion notes that your mortgage lender will specify a minimum down payment amount due. Depending on the type of loan, he says this can be as low as:

Keep in mind that conventional loans with down payments of less than 20% of the home’s value will require private mortgage insurance (PMI). You’ll have to pay PMI until your loan reaches 80% loan-to-value ratio (LTV).

What is included in closing costs?

“Closing costs are expenses related to borrowing a mortgage and closing the home purchase,” Ailion says. “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.”

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Closing costs can range between 2% and 5% of the purchase price. “A buyer can negotiate with the seller to pay some or all of these costs,” says Ailion.

Your mortgage company will issue you a Closing Disclosure at least three business days before your closing day. It will have a complete list of all of your closing costs and the total that you owe. Common costs to plan for include:

  • Discount points: Also known as prepaying interest, this is an optional upfront fee paid to directly lower your mortgage interest rate and monthly mortgage payment. The lender is not allowed to use these funds for overhead or profit
  • Escrow fee: Fees paid to a third-party escrow company that handles funds and facilitates the home sale
  • Home appraisal fee: Fee to evaluate the home’s fair sale price or refinance value
  • Home inspection fee: Fee paid to a licensed home inspector to assess a home’s condition
  • Homeowners association transfer fee: This type of fee is only applicable to homes within a planned community that is governed by an HOA. It covers the cost of transferring HOA fees from the seller to the buyer. The seller generally pays transfer fees, but sometimes buyers pay
  • Loan origination fee or broker fee: A fee the lender or broker charges for its services. This fee can be heavily negotiated, as it is mainly paying for lender overhead and adding to its profit. These types of fees may also cover the cost of reviewing the borrower’s credit report
  • Prepaid taxes and insurance: Generally you pay six months to a year of property taxes and homeowners insurance in advance when you close
  • Processing fee or underwriting fee: A mortgage application fee is often charged to pay for the lender’s employees who gather documentation, coordinate with third parties like appraisers, and manually look at the file to approve the loan. If this is not charged separately, it is rolled into the origination fee
  • Real estate commissions: Typically paid by the seller, these fees are paid to a buyer’s agent when purchasing a new home
  • Real estate attorney fee: Fee paid to a real estate attorney for reviewing home sales contracts. Not all states require an attorney to handle real estate transactions
  • Recording fees: Fees paid to your county clerk’s office to record the sale of the home in the public record
  • Title search fee and title insurance: Fees paid to check historical records for liens against the property and to ensure it can be legally transferred to you

What’s more, a borrower may have additional closing costs depending on the type of mortgage they’ve secured.

  • VA funding fee: Those who purchase their new home with a VA loan are charged a VA funding fee which may be paid at closing. However, most VA borrowers roll this fee into their loan amount to avoid paying it upfront
  • FHA mortgage insurance: Borrowers using the FHA loan program will pay an upfront mortgage insurance premium (MIP) fee. The current upfront charge is 1.75% of the loan amount. This can be rolled into the loan amount to avoid paying upfront

Today’s mortgage interest rates

Whether you’re a first-time home buyer or a homeowner refinancing their current mortgage, it’s wise to keep track of what’s due and when. And plan out a timeline for saving enough funds for each of these items.

Tracking your purchase timeline and firming up deadlines with your agent can help you complete a successful homeownership journey. Take the first step today by checking your current mortgage options.

Time to make a move? Let us find the right mortgage for you

Erik J. Martin
Authored By: Erik J. Martin
The Mortgage Reports contributor
Erik J. Martin has written on real estate, business, tech and other topics for Reader's Digest, AARP The Magazine, and The Chicago Tribune.