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Joe Ready's Blog

By Joe Ready | Broker in Chelmsford, MA

How much of a down payment should I put down on a house?

Chelmsford, MA Real Estate


How much of a down payment should I put down on a house?

This is a good question asked by many buyers purchasing a home.  First we’ll start with the basics.

What is a down payment?  A down payment is the earnest money that a buyer will put down on a contract to purchase real estate.  The money placed as a down payment is used to secure the contract and show “good faith” to the sellers of the property.  If all goes well, the money will be applied towards the purchase of your new home.   In the event that the buyer does not perform as the contract states, the money would be used as liquidated damages and awarded to the seller for non-performance of the contract.   In order to make a contract valid, a sum of money must be put down as a deposit.  This amount could be as little as $1.  Massachusetts is a two contract state, which means that you will be placing a deposit on the initial contract to purchase and a second deposit on the purchase and sale agreement.

How much money should I put down?

This amount will vary depending upon the purchase price of the property, the type of financing you will be receiving and the competitiveness of the real estate market.   The sellers will be evaluating your offer to purchase based on the amount of “earnest money” that you are willing to put down on the contract.  Depending on the local real estate market, it could be anywhere between 1% to 5% of the purchase price.  Recently I received multiple offers to purchase on a property for sale in Chelmsford, MA and the deciding factor was the amount of money the buyer was willing to put on the contract.  The larger the deposit the more serious and stable you look as a buyer.  Sometimes you may not have the physical cash to place on the contract because you’re borrowing from a 401K or some other source.   It is okay to put a smaller deposit, but it will be evaluated closely by the sellers before accepting an offer to purchase.  You should consult with your buyer’s agent as to how much they think you should place on the contract.

Who do I give my deposit to?

You should make sure that your deposit is held by a reputable third party escrow agent.  In the event of a dispute your money is being held safely until a decision is reached by the parties involved.   As a real estate broker, I have a separate escrow account to hold buyers funds during the contract period.  If you’re purchasing a home from a relative or a for sale by owner, ask to give the deposit to a licensed attorney or a third party escrow agent that can help keep your money safe.

Can I get my money back?

It’s important to read and understand the terms and conditions of your contract.  You should consult an attorney if you do not understand the terms and conditions of the contract.  Most contracts, but not all, contain contingencies that allow you to receive a refund of your money.  Two standard contingencies used in Massachusetts are a home inspection and mortgage financing contingency.  After conducting a home inspection, if the home does not meet the standards you were expecting, you may ask for a return of your deposit.   If for some reason you are unable to obtain financing after applying for a loan than you may request a return of your deposit.     

There are situations that arise where a buyers deposit would not be returned.   A buyer may choose not to complete any of the terms of the contract and walk away from the property without using any contingencies.  In this case, a buyers deposit would be used as liquidated damages and be awarded to the seller.   A deposit is meant to keep the buyer honest and is the only protection the seller may have in a real estate transaction.

I always recommend that buyers hire a licensed attorney to review their purchase and sale agreements.  It’s important to understand the terms and conditions that you are agreeing to especially when placing a large sum of money down on a contract.

Contact Information

My name is Joe Ready.  I am licensed Real Estate Broker in Massachusetts, New Hampshire and Connecticut.  I am happy to answer any questions buyers may have about the real estate process.   I truly enjoy helping buyers find the right property and negotiate a good purchase price.  Contact me anytime at 978-256-3335 or by email at joe@readyre.com.

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