Earnest Money Deposit

You found the house of your dreams and you’re ready to put an offer on it. Hooray! But as you’re looking over the contract, you reach the section referring to your Earnest Money Deposit. Hmm, what is this?

Think of the Earnest Money Deposit (EMD), just as the name suggests. It’s a deposit that you are putting down on a home that shows how serious you are in your commitment to this purchase. But, there’s a little more to it than that…

Here is a list of things to know and consider when dealing with the EMD:

Earnest Money Deposit

First Things First

The number one rule is to make sure everything is outlined in the contract. Read every word in the contract and make sure you understand what you are signing. Look out for wording that may prevent you from a refund of your deposit, check for cancellation fees and other fees. And know that while there may be local “customs” among real estate professionals in your market… EVERYTHING is negotiable until you sign the dotted line. Also, follow state guidelines throughout the process. Each state has different rules to follow when dealing with the Earnest Money Deposit, so know the rules. And be sure to consult with your real estate agent if you have any concerns.

When Should You Pay the Earnest Money Deposit?

Each locality is different, but typically the EMD is paid within 24-48 hours of a ratified contract (this is where both buyer and seller come to an agreement on all aspects of the purchase contract, and all parties sign the agreement). However, sometimes the EMD must be paid upon submission of the offer. Read the contract for specifics on when it must be paid and rely on your expert real estate agent to guide you through this process.

How Much Should You Offer?

In real estate, it is rare to have an offer that doesn’t include some form of an Earnest Money Deposit, but there is no legal minimum or specific requirement. Know, however, that if you do not list any type of EMD in your offer, a seller probably won’t even entertain your offer.

At the same time, be careful offering and paying too much of an EMD if you are obtaining a mortgage, because some lending institutions monitor closely any sudden cash flow from your bank account, and will request bank statements to verify that you had this money in your bank usually for at least 60 days.

Use your best judgement, but typically, the EMD offered ranges from 1-3%. This amount may be higher or lower, depending on factors such as: market conditions, type of property being sold, property price, interest level, and whether the property is bank owned (they typically layer on their own specific terms for how offers should be submitted).

In a hot seller’s market, it makes sense for buyers to present a large earnest money deposit to entice the seller to accept the offer. In a buyer’s market, a lower EMD would suffice, or a higher EMD offer might convince the seller to accept a lower purchase price.

In either case, realize that the seller will take their home off the market for you, so they need the highest faith that you will make it to the closing table. If you have stipulations that might deter the seller, such as needing a longer time period until closing or using a zero-down loan product, for example, then a higher EMD might help your cause.

So, the big question is, how much are you willing to offer, and thus willing to forego if you do not follow through with your commitment? We will get into that in a moment, but first, who will you make the check out to?

Who Holds the EMD?

The Earnest Money Deposit is typically held by the Title or Escrow Company, although some brokerages can hold onto this until closing as well. Just make sure you clearly list who will hold it in the purchase agreement, and always make it out to a company, not an individual. (Your real estate agent can help make sure that all the proper laws are followed.) Your deposit will be placed in a neutral trust account, called escrow, until all the terms of the contract are satisfied, and Settlement occurs. Be careful who you hand the earnest money deposit over to. Typically, you can give the check to your real estate agent so that they can ensure it is properly placed with the escrow account. Never hand it over to the seller, as this can be construed as a personal payment and will not hold any legal protection. Make sure you receive a receipt, and realize that once your EMD is deposited in the escrow account, it is no longer your money, it belongs jointly to you and the seller.

Earnest Money Desposit held by Escrow Company

Terms not Met, Times of Dispute?

The contract discusses how and when the EMD will be dispersed. It will specify what conditions need to be met, how much will be refundable, if any fees will apply, etc. If the buyer does not follow through with the terms and conditions of the contract, they could lose their EMD.

What if it isn’t your fault? What if the home doesn’t appraise, you can’t obtain financing or something very concerning is found during the inspection period, for example? In this case, it should be returned to you, as long as it was due to contingencies outlined in the contract, and as long as the contract specified that it was due back to you. Likewise, if conditions are not met due to no fault of the seller, the buyer may need to forfeit the refund all or some of the deposit.

Typically, if either party is unable or unwilling to fulfill their obligations listed in the contract, and either or both parties refuse to sign the release of the EMD to either side, it will need to be settled in arbitration or in court. And while this is rare, this does cost time and money, so it is always advised that both parties negotiate and work it out between each other.

If for some reason a dispute arises about the return of the earnest money deposit, the EMD will remain in the escrow account until it is resolved. Both buyer and seller must agree on the disbursement of the funds before it will be released from escrow. If no agreement is made, it will stay in escrow until both buyer and seller can agree.

All Terms of the Contract are Met, Now What?

So your Purchase Agreement has been fully executed, all inspections were conducted and passed, all HOA documents were received and agreed to, appraisal was spot on and all conditions have been met as described in the contract. Now what?

The contract outlines the disbursement of the EMD. Once all conditions of the contract have been met, and you are sitting at the closing table, you can choose where you want your earnest money deposit to go. You can apply it to the closing costs or the down payment, or you can have it credited to you if your EMD exceeds your balance due at closing. Consult your real estate agent if you have any questions about how you’d like your EMD handled at closing.

And that’s it! Now that you have signed all your paperwork and your EMD has been allocated appropriately, high five your Realtor, grab your new keys, and go enjoy your new home! You’ve worked hard! Reward yourself for a job well done!

Want more homebuying advice? Nestiny is a great place for homebuyer education and to help you gauge how ready you are to buy a home. Journey Homeward allows you to enter all your wants and needs while the True Affordability Tool will break down your budget, showing what you can comfortably afford. You will also receive a Ready Report that will give you a vital head start in the home buying journey, saving you valuable time and money.

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