What is an Earnest-Money Deposit?
The
earnest-money deposit (EMD) is money that a buyer puts in escrow as a sign of
good faith to show s/he is committed to the transaction. The buyer
generally pays in the form of a personal check or certified check which is
deposited with the Listing Broker, Selling Broker or Title Company based on the
terms of the contract. In all cases it goes into a non-interesting
bearing account. If the sale goes through, the earnest money is applied toward
the down payment. If all contingencies have been removed and the sale does not
go through, because the purchaser defaults on the contract, the EMD may be
forfeited. If the sale does not go through because one of the
contingencies is not met, for example an unsatisfactory contractor’s
inspection, the purchaser will likely get his/her EMD back, but it has to be
agreed to in writing by all parties.
How much
should you put down?
Earnest payments
generally vary, according to the attractiveness of the home and is often in
accordance to the demand in the real estate market.
Typically, buyers want to balance the need to show that
they are a serious buyer with the potential loss of the EMD. It is common
to put down 1-2% of the sale price. In a competitive situation, 3% or
more may be advisable. When dealing with a cash offer on a foreclosure, the
bank may ask for 10% of the sale price. Of course, this all depends on
the individual transaction.
Is this an additional
cost to purchasing a home?
Your EMD will be credited toward the down payment at
closing. This is not an additional cost, but an investment in your
closing expenses. If for any reason it exceeds your mortgage down
payment, you will be reimbursed the balance at closing.
Can Buyers lose
their Earnest Money?
Yes,
if a buyer defaults on the contract their EMD could be forfeit. If a buyer does
not notify the seller of objections to an inspection or other contingency in
the time frame allowed by the contract, the buyer may waive their right to
their EMD. EMD can only be released if all parties agree, so even in a
situation where they buyer walks from a contract because of an unsatisfactory
inspection, the seller may see it otherwise and refuse to release the
EMD. A dispute such as this may result in small claims court or
arbitration.
When does
Earnest Money get deposited?
By
state law, the Earnest Money must be deposited within 2 banking days of
acceptance of the offer. So if a buyer writes a check, that check will be
cashed within 2 banking days of the contract being accepted.
This
blog was meant to give the basic information regarding EMD, and not meant to
take the place of a Realtor or Real Estate Attorney.
