Just what IS Earnest Money Deposit?
There are many terms and acronyms that one will hear during a real estate transaction and "EMD" or Earnest Money Deposit is one of them!
Broken down quite simply, the Earnest Money Deposit is a good faith deposit that is given by the purchaser or a property to the seller. You will make your deposit at the same time you present your offer to the seller. As each state is different, it is very important that you speak with your Realtor© about the ins and outs of this process. Most typically, the funds (usually deposited with your real estate agent's broker or the title company) are deposited into an escrow account.
An escrow account is a bank account that exists for the purpose of holding funds until they are needed, most often at the time of settlement. Once settlement occurs, the deposit is applied to either closing costs, your down payment or returned to you at closing.
Why is Earnest Money Deposit necessary?
When you write an offer to the seller of the home you are interested in purchasing, providing an Earnest Money Deposit shows the seller that you mean business, that you are willing to "put your money where your mouth is" and also allows your offer to stand out above the others, should there be multiple offers received.
If your situation is one of multiple offers, you may want to consider upping the ante a bit and offering a larger EMD. As you begin a relationship with the seller of the property you are interested in, it is important to start off on the right foot.
Contingencies and the Return of the Earnest Money Deposit.
Contingencies protect the buyer through the home buying process. If there are issues with the home inspection, or financing becomes unattainable, etc, contingencies are what exist to allow the buyer to walk away from the contract. In these cases, the Earnest Money Deposit is typically returned to the buyer. However, if the buyer cancels the contract for a reason not covered by a contingency, the deposit is generally forfeited to the seller.
How Much Will My Earnest Money Deposit Total?
Depending on the area you are purchasing in, the price of your home, and the specifics to your transaction, the Earnest Money Deposit total will vary. Typically the Earnest Money Deposit is between 1-2% of your sales price. As discussed previously, if you are competing against other offers, you may want to consider a higher EMD.
What are Contract Contingencies?
We cannot stress enough how important it is that you have a trusted and experienced Realtor© when buying a home. Your agent will help you understand all applicable dates for each contingency, as each one can impact the potential return of your deposit. Contingencies are written and utilized to protect both parties, but most specifically, the buyer. Below are some of the typical contingencies written into an offer to purchase a home:
- Contingent on selling your current home
- Contingent on a home inspection
- Contingent on appraisal
- Contingent on obtaining financing
If you have more questions about the Earnest Money Deposit process, or the steps to purchasing a home, feel free to email us or call for more information!