An earnest money deposit (EMD) is the ‘good faith deposit’ you put down in closing to prove you are a serious buyer. This deposit is given when the house is taken off the market for the intended sale and stays in escrow until the close.
As a purchase agreement can take time to process, earnest money ensures that the seller won’t experience a total loss should the contract fall through. There are conditions where this deposit can be credited back to the buyer if the deal doesn’t go ahead, otherwise, the seller may keep the funds.Â
Is it Normal to Have an Agent Suggest an EMD in Your Offer?
Earnest money is commonplace in most real estate transactions today, especially in a buyers market. It discourages a buyer from making multiple offers, which is a concern for sellers in a competitive market.
A real estate agent may even recommend putting down a higher EMD to increase chances of getting the house. Earnest money also is helpful for the buyer as it gives them time to pull together the rest of the funding as well as perform routine inspections.Â
How Much is Earnest Money?
Typically, earnest money is between 1-3% of the sale price, meaning the more expensive the home is, the higher the fee. However, in certain regions and periods of high market competition, earnest money can fluctuate to up to 10% of the sale price.Â
What Does Earnest Money Go Toward?
If the deal goes ahead, the earnest money goes towards the down payment or closing costs on your new home. It will be listed in your closing disclosure prepared by your mortgage lender, under ‘Cash to Close.’ This section will also include the other closing costs you are required to pay.
What’s the Process of Depositing Earnest Money?
The amount of earnest money will be outlined in your purchase offer. Upon acceptance of the offer, you have 3-5 days to send the amount to an escrow account or trust of an escrow party.
Typically, you send proof of transfer to your agent to forward on to the seller’s agent. As this process can vary by state, the specifics will be outlined in the purchase contract.
You can make the earnest money payment via the following methods:
- Wire transferÂ
- Certified check
- Personal check
Be wary of sending money directly to a seller. Working with an escrow company is the safest option as they are designed to protect both parties involved.
If I Back Out, Is Earnest Money Lost?
If the deal falls through, the money can either be returned to the buyer, or kept by the seller. Typically, the seller will keep the money if the buyer changes their mind without a valid reason outlined in a safeguard clause.
This is fair when you consider that the seller has taken their home off the market, losing time and energy. However, if the home falls into one of the contingency categories below, then the buyer may be refunded the earnest money.
Earnest Money Contingencies
Here are some of the most common contingencies that may be included in the contract. In these cases, the buyer is protected and will receive a refund for their EMD should they chose to back out.
- Inspection Contingency: When an inspection fails or returns with unexpected or high-cost issues.
- Mortgage Contingency: When the buyer is unable to secure a mortgage. Check our mortgage calculator before putting in an offer.
- Appraisal Contingency: When a home appraiser values the home lower than the mortgage.
- Insurance Contingency: When an insurance lender refuses to insure a property.
- Title Contingency: When a seller cannot provide proof of valid legal ownership of a home.
- Home Sale Contingency: Permits the buyer to delay closing until their current home is sold.
Movoto Is Here For You
An EMD isn’t always required, but it is useful in a competitive market. Whether you’re on the buy or sell side, it’s important to pay attention to the fine print about earnest money deposits to ensure that you know the conditions.
We cover topics from debt-to-income ratios to getting a mortgage pre-approval, seller concessions and more, let us assist you with all things real estate.
