This post was contributed by a community member. The views expressed here are the author's own.

Health & Fitness

Planning to Buy a Home? Know What Earnest Money is?

What is an Earnest Money Deposit?

An Earnest Money Deposit (EMD) is essentially a show of good faith by the prospective purchaser when submitting an offer on a property, and should not to be confused with a down payment.  An EMD says to the seller: "Yes, I am serious enough about buying your house that I'm willing to put my money where my mouth is, and I realize that if all contingencies have been met I could lose my earnest money if I back out."

So, How Much is Enough?

Find out what's happening in Burkewith free, real-time updates from Patch.

Because there is no set amount, EMDs vary from market to market, as well as regionally. If it's a seller's market, with many buyers fighting over limited inventory, it makes logical sense for the buyer to put down a much larger earnest money deposit to entice the seller to accept their offer. Believe it or not, I've had buyer's lose a home due to another offer coming in with a higher earnest money deposit. In buyer's markets, a larger earnest money deposit might entice a seller to accept a lower purchase price.  So you see, it all depends.  Seller's feel more secure that the sale will actually go through if its "painful" for a buyer to walk away from a home and potentially lose their earnest money. With all of this said, the earnest money deposit is usually at least 1% of sales price, but not always.  Also, by law the EMD check must be deposited in the escrow account within 48 hours of ratified contract.

Be Careful to Whom You Give Your Earnest Money Deposit

Find out what's happening in Burkewith free, real-time updates from Patch.

  • Never give an earnest money deposit to the seller.
  • Make the deposit payable to a reputable third party such as your Real Estate brokerage (i.e. RE/MAX Allegiance) legal firm, escrow company or title company. Never make an EMD check payable to your Realtor.
  • Verify that the third party will deposit the funds into a separately maintained trust account.
  • It is not advisable to authorize a release of your earnest money from the escrow account until your transaction closes.

Is Your Earnest Money Deposit Refundable Upon Cancellation?

If a sale falls through, the sellers and buyers are asked to sign mutual release instructions. If an agreement cannot be reached, the party holding the earnest money deposit will continue to hold it until an agreement is reached. There are certain contingencies that have to be met before the EMD is at risk of being kept by seller. These contingencies might include: home inspection, radon, lead based paint, HOA and/or condo docs, appraisal and finance contingencies.  

Example

A buyer's $3,000 was deposited into escrow one month ago when the home sale was ratified. Unknown to the seller or real estate agent, the buyer decided to buy another property and back out of purchasing the home. Is the purchaser at risk of losing their Earnest Money?  If  A. the inspection(s) has been completed and all inspection items have been agreed upon.  B. The appraisal has come in at or above sales price. C. HOA and or Condo documents have been delivered/signed for and three days has gone by. D. Loan has been approved.  Well then, yes, the buyer might be at risk of losing the $3000.

There's a lot more to this so it's not cut and dry. What if a final walk thru is done and it's evident certain inspection items have not been repaired as agreed? What if the appraisal comes in lower than the sales price and the buyer and seller cannot come up with an agreement? What if all contingencies have been met, but a tree falls through the roof one week before it's supposed to close? In these cases it's likely that the EMD would be refunded to the purchaser.

When does a buyer see the EMD again?

At closing, the title company will prepare a HUD-1 Settlement Statement, which will list all of the debits and credits for both the buyer and seller. The earnest money deposit will be listed as a credit to the buyer, while any other funds owed will be listed as debits. The closing agent will add up all of the debits and credits for the buyer to get a final amount of funds required at closing. This is the method used to apply the earnest money properly. The earnest money might get credited towards closing costs or, if they are being paid by the seller…the amount of the loan.

So, as you can see, there's a lot going on with the earnest money deposit part of the home sale equation.  A thorough understanding of these issues and how to deal with them is what a good realtor brings to the table.  As always, if you're in the market to buy or sell a home, feel free to get in touch - I'm always happy to help!

Ellen Moyer, RE/MAX Allegiance   www.ellenmoyer.com

We’ve removed the ability to reply as we work to make improvements. Learn more here

The views expressed in this post are the author's own. Want to post on Patch?