What is the earnest money deposit?

When writing an offer for a real estate purchase, one of the terms of the contract, is the earnest money deposit or EMD.  The EMD is an amount of money that a buyer puts up as a “good faith deposit”, showing the seller that you are a serious buyer.  

When a seller accepts a contract, they are taking the property off the market throughout the entire purchasing process, and if for some reason the buyer decides to pull out or the deal falls through for any other reason, the seller will need to relist the property, causing the seller to take a financial hit.  

So this EMD is a way to protect the seller if the buyer backs out and although the EMD is not required in most contracts, it is doubtful that a seller will accept a contract without some protection.  

If all goes smoothly, the EMD amount will be applied toward the down payment or closing costs. On average, the typical EMD is between 1-3% of the sales price and is held in an escrow account until settlement. In a more competitive market, with multiple offers on a property, the higher the EMD, the more attractive that offer may be to the seller.

Now, just like the EMD is a protection for the seller, there are certain scenarios in which the buyer’s EMD can be protected.  These scenarios would occur based on any contingencies agreed upon in the contract. For example, if you could not agree on repairs or credits based on the home inspection contingency, you would have the ability to back out and get your deposit back. If you had an appraisal contingency, and the property didn’t appraise at the contract price and you couldn’t come to an agreement, you would also have this protection.  Or let’s say you had a financing contingency and you no longer were able to be approved for the mortgage, you would be protected from losing the deposit.

If you have any questions about the Earnest money deposit or how to protect yourself in a real estate contract, give us a call today or slide into the DM’s. 

We look forward to hearing from you!