The Earnest Money Deposit (EMD) is an important aspect of the house buying process. This deposit essentially indicates to the seller that you, the buyer, are serious about wanting to purchase their home. The deposit shows you are committed. Once the deposit is accepted by the seller, the property is then taken off the market, therefore the seller is trusting that the buyer is eager to move forward with the sale. Otherwise, the seller is losing valuable time and money by removing the property from active listings. It is also a safeguard for sellers, deterring buyers from making offers on multiple properties.
So what do you need to know about the Earnest Money Deposit?
The deposit is deducted from your down payment at the time of closing. It is not money you pay in addition to the down payment and closing costs. You need to think of it as paying a portion upfront of what you would already owe at closing.
On average, the deposit amount is 1% to 2% of the total home purchase price. In a slow market, where houses are listed without much movement, your agent might suggest putting a smaller deposit, such as $500-$1000. However, in a seller’s market, where houses are selling rather quickly, your agent will suggest putting down a deposit of between 2% to 3% or higher if you are likely to find yourself in a bidding war.
The deposit money is put into an escrow account until the day of closing.
What happens to the money if the deal falls through?
Usually, a fee will be taken from the deposit, and whether or not the rest is returned to the buyer depends on the circumstances. Be sure that the Purchase and Sales agreement specifies what happens to the money should you have to back out on the sale.
That being said, it’s important to discuss with your real estate agent what contingencies you should include in your agreement. Without contingencies, the seller has every right to keep the deposit. In other words, you cannot simply decide you don’t want to go through with the purchase any longer and expect to get the money back.
Financing Contingency – Covers the buyer is financing falls through for unforeseen reasons that the buyer had no control over
Inspection Contingency – Protects the buyer should something be found upon inspection. This clause indicates that the buyer can back out, renegotiate or request that the seller fix the issue prior to purchase.
Home Sale Contingency – Though some sellers might be reluctant to agree to this, this contingency protects the buyer if they are unable to sell their current home prior to the agreed upon closing of the new home.
Title Contingency – If for some reason the title company cannot clear the title of the home, the buyer is not penalized.
Appraisal Contingency – Protects the buyer should the house not appraise for the purchase price.
The Earnest Money Deposit is clearly an essential aspect of the home buying process, and quite frankly the process will likely not move forward without it. But you need to take the advice of your real estate agent in deciding the amount of deposit offered, and what stipulations and contingencies need to be put into place.