Who actually gets the down payment? Episode #267

Hello! Welcome to Todd Miller TV. Today’s update is who actually gets the down payment when you’re buying a house. So, there’s this misconception out there that when you put a down payment on the house, that’s money you’re giving to the bank. It’s a down payment to the bank on a Loan. And that’s actually not the case. So I’ll put it in simple terms. We’ll take up purchase of a $100,000 on a home. And we’ll take $20,000 down payment. We’ll just say it’s 20% down conventional loan. Okay? So you put 20% down, you’re getting a loan for $80,000. Well there’s this misconception that you’re giving the bank $20,000 and that they’re giving you a Loan for $80,000 to buy the house. But the truth is, the bank never gets that $20,000. That actually/the down payment actually ends up with the seller. So the way it works is the seller sells the house for $100,000, they take the $100,000 and that’s their money. You get the house in exchange for that. The bank/where the cash comes from this 20 comes from you the buyer goes right to the seller. Then the 80 comes from the bank as a loan to the seller. So the loan goes to the seller, the down payment goes to the seller. So this misconception that the loan/that the down payment the bank gets, they hold that down payment as security or whatever, it’s not the case. They doesn’t make any money unless you pay broker fees or loan fees to the bank upfront which are not part of the down payment. They make those to process and service and manage the loan. They make money throughout the loan. They sell the loan and they’re able to make money in other ways. and they make ofcourse interest on the loans. Right? So they make their money that way. Now, how this plays is to the earnest money. Now, let’s take the same example. Let’s say you put a $5,000 earnest money deposit down on the property. So you got a $100,000 property, $5,000 earnest money deposit, and that means when you close you have to show up with another $15,000 to complete the $20,000 down payment. So that earnest money is part of the down payment. Now, let’s say that you have to extend escrow by 2 weeks, and the sellers says “I don’t wanna do it! I’m gonna put the house back on the market, sell it to somebody else.” You go “No, everything’s gonna be fine. I just need 2 more weeks to get the loan done.” You can release the earnest money to the seller. Now, a lot of people don’t do that ’cause they say “I need that $5,000 towards my $20,000 down payment.” Well the truth is, that’s already counted against that. So, a release of EMD is just the same thing as giving them that money upfront and then, now you only owe them $95,000 ’cause you’ve already given them $5,000. So, you owe them $95,000, you’re still gonna get a loan for $80,000, you still only come in with $15,000, so you don’t have to come in with more money. Just because you released EMD now, the reason, the thing to be careful of is if you released EMD, it goes to the seller, and you can’t perform on the loan, you don’t get it back. It’s gone! It’s already got it. It’s not sitting entitle to dispute at that point you releasing it. So, it’s basically what you’re agreeing to by doing that, is saying “Yeah, I’ll just let them have the earnest money deposit and as my good faith that I’m gonna go through the transaction.” If you’re not able to go through then you don’t get the money back. So, but where the deposit goes in the down payment on a Real Estate purchase, always been a source of confusion for the public but, it all goes to the seller. All money goes to the seller in a Real Estate transaction. The only way people make money is through charging other fees. Agent’s make money through charging fees to the seller and the buyer. The banks make money by charging interest on the loans and by charging fees to do the loan. Title companies make money by charging escrow fees and title insurance fees and things like that. So, but that whole money technically all goes to the seller. All the money that comes from them. So anyway, I thought I would share that with you. I’ve cleared up some misconceptions you had. And you know, as always, you know, this isn’t legal advice. If you get in disputes and things like that you should always go to an attorney. But those are the Real Estate principles of how that tends to work. There are things you could read in the Real Estate textbook basically. So anyway, I thought I would share that with you. That is my update for today and hope to see you on another video. Thanks