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Real estate terms: A deposit versus a downpayment

There are so many terms bantered about in the Alabama real estate industry that it's often difficult to know what's what. Two terms that often are used interchangeably, but mean different things, are earnest money deposit and downpayment. An earnest money deposit -- sometimes known as an escrow deposit -- is the sum the purchaser includes with a real estate offer as a sign of good faith that he or she is genuinely interested in the property and serious about buying it.

A downpayment, on the other hand, is the percentage of personal funds a purchaser will put down on a property, with the rest is usually being financed. Deposits are usually between about 1 and 2 percent of the purchase price, though a purchaser could choose to have a bigger deposit. If the funds are cashed, they are deposited into an escrow account and will be put toward the purchase price of the home or can be used toward closing costs.

The downpayment is made to the seller and not to a bank, mortgage company or other lender. The funds are from the purchaser's personal savings or can be gifted. In any case, that money is due on closing. The minimum downpayment acceptable to lenders is typically 3 percent, while many mortgage loans require downpayments of 20 percent or more. 

There are all kinds of rules that go along with buying and selling real estate in Alabama. They're enough to make one's head spin. That's why having the advice of a real estate lawyer may save both money and stress in the long run. An attorney will work on behalf of a client to ensure his or her best interests are at the forefront of any real estate transaction.

Source: realtor.com, "Earnest Money Deposit vs. Down Payment", Margaret Heidenry, Accessed on May 11, 2018

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