Down Payment vs. Deposit: What’s the Difference?

If you’re a first time home buyer, you might be surprised to learn that in most cases, you’ll have to make an initial deposit on a house before you make your down payment and close on your new home. 

Say what? 

The idea of a down payment vs. a deposit might come as a surprise, but the good news is that both are pretty straightforward and easy to understand. We’ll show you the difference between a deposit and a down payment, and lay out the who, what, where and how much of both.  

Get ahead in the home buying game with down payment assistance

If you’re short on down payment funds, you might qualify for assistance to help you buy your first home sooner.

Disclaimer: This article is for informational purposes only and should not be considered as legal or financial advice. Please consult an attorney, mortgage lender, or CPA for guidance on your specific situation.

Down payment vs. deposit: Making sense of it all

When you buy a house, there are two points when you can invest lump sums of money: when you make an offer on the house and when the sale closes. One of these times is when you make a deposit, and the other is when you make a down payment. 

What is a deposit for a house?

A deposit for a house, AKA earnest money, is money you put up when you make an offer on a home. It isn’t required, but it’s considered a good faith gesture to the seller that you’re committed to the purchase. A typical deposit is one to three percent of the purchase price. It doesn’t guarantee the sale will go through.

If you, as the buyer, back out of the sale after the seller has accepted your offer, your initial deposit on the house is forfeited to the seller. This is how a deposit can increase the chances of closing the sale on a house, because the deposit helps assure the seller that you aren’t going to get cold feet after they accept your offer.

Even though a deposit is a useful tool, it’s not required to make an offer on a house.

What is a down payment for a house?

A down payment is essentially the first payment you make on your purchased house. You make your down payment after the seller has accepted your offer and a lender has agreed to give you a mortgage loan. It’s very rare for a house sale to be canceled after the down payment has been paid. 

A down payment is not required to purchase a house. There are mortgage loans structured for buyers who make no down payment. But buying a house with a down payment is much better than buying a house with zero down payment. It lowers your interest rate and monthly mortgage costs, and it increases your purchasing power. 

That doesn’t mean you must wait until you’ve saved up a down payment before you consider buying a house. Down payment assistance can help you get the best interest rates available to you, reduce your down payment, and even cover closing costs and initial home improvements.

Does a deposit go towards my down payment?

If the home sale closes after making a deposit, the deposit goes toward your down payment. On the other hand, if the seller rejects your offer and there is no sale, your deposit gets returned to you.

As such, it’s totally acceptable to use a portion of the money you’ve allocated for a down payment to make the initial deposit on a home. If you make a deposit and then later receive down payment assistance, your deposit also gets added to your down payment assistance.

When do I make the initial deposit on a house?

You make the initial deposit on a house when you make an offer. The deposit funds are held in an escrow account until the sale closes, at which time the deposit funds are added to your down payment. If the seller rejects your offer, the deposit held in escrow is refunded to you.

Strategically, many home buyers only make an initial deposit if they think they might need it to get the offer accepted.

For example, if your offer is for the exact selling price of the house, and you suspect other buyers might make offers for more than the asking price, you might opt to make an initial deposit to entice the seller to accept your offer for the benefit of a more assured sale.

When do I make the down payment?

You make the down payment at the end of the sale process, when the sale closes. The lending officer or settlement agent collects your down payment and any down payment assistance funds, then adds them to your deposit. The rest of the purchase price is covered by the mortgage loan that your down payment helped secure.

Is a home buying deposit always required?

No, you can make an offer on a house without including a deposit. The deposit simply entices the seller to accept your offer. You can strategically use an earnest money deposit to make your offer more attractive if you suspect the seller is getting many offers on their house or offers that are higher than yours.

Benefits of making a deposit

Although you aren’t required to include a deposit (AKA earnest money) when you make an offer on a house, there are several benefits to doing so, especially in a tight housing market. 

First and foremost, making an initial deposit shows you are serious about the house and intend to follow through with the sale. No seller wants to be strung along only to have a buyer back out at the last minute, so this relatively small gesture can make all the difference in getting your offer accepted.

Likewise, this earnest money deposit demonstrates your financial strength and helps your offer stand out in a crowded field of prospective buyers.

What if I back out after making an initial deposit on a house?

This is a reason you might not want to put up a deposit when you make an offer on a house. If you make an initial deposit, then back out of the sale after the seller accepts your offer, the deposit goes to the seller. 

Because of this, it’s wise to use earnest money deposits strategically, rather than including a deposit with every offer you make.

There are several reasons why you may want to back out of a sale after making an offer. In most cases, you won’t know everything about the house when you make an offer, and the required inspections and preliminary steps may reveal that the house is less than desirable, in which case you may end up abandoning the purchase.

Clearly, it’s best if you follow through on the purchase if the seller accepts your offer. You want to buy the house. However, a sale is not guaranteed, even if the seller accepts your offer. Therefore, you should make a deposit only if you’re relatively certain nothing will change your mind about the purchase.

Frequently asked questions

Here’s a short round-robin of the most frequently asked questions about down payments and deposits.

Is a deposit the same as a down payment on a house?

No, a deposit is not the same as a down payment on a house. You pay a deposit when you make an offer on a house. If the seller rejects your offer, you get the deposit back. If the sale closes, the money gets added to your down payment. A down payment is paid at closing. It’s the first payment you make on your home. 

Is the deposit part of the down payment?

Technically, the deposit is not part of the down payment. It’s a separate payment that you make when you make your initial offer. However, if the sale goes through, your deposit gets added to any other down payment you make. 

Does a deposit go towards payment on a house?

A deposit goes toward payment on a house if the sale closes. However, making a deposit does not guarantee the sale will go through. If the seller rejects your offer or the sale is canceled for any reason, your deposit will not go toward payment on the house.

How much should a deposit be?

In most cases, a deposit should be between one and three percent of the purchase price on the house. Of course, this is just a general guideline. It may be appropriate to offer more or less than one to three percent, based on the asking price and how much money you have for a deposit and down payment.

Increase your purchasing power with down payment assistance

If the idea of making a deposit and a down payment on a home seems out of reach, it doesn’t have to be. There are a number of down payment assistance programs designed to help first time homebuyers increase their purchasing power and get into a new home sooner. 

The only problem? It’s hard to make sense of all the information out there, let alone figure out a way to compare all of your options side-by-side. 

Until now. 

With Stairs Financial, you can easily find out exactly which down payment assistance programs are available to you, compare each program side-by-side, and make a more informed decision.

Stairs connects you to qualified lenders who work with all the down payment assistance programs you might qualify for, then lets you compare your options side-by-side.

Learn more.