What Is An Earnest Money Deposit?
What is Earnest Money and why is it important to your real estate transaction?
My good buddy Randy Lynch told me the story about a client who wanted to know “Who this Ernest guy and why does he want my money?” Well, let’s dig in and find out!
The EARNEST MONEY DEPOSIT or EMD is a good faith gesture (in the form of money) that a buyer presents to a seller along with a purchase offer, to show that they are serious about completing the contract. It’s their financial “skin-in-the-game”.
Because your offer to purchase effectively takes the sellers home off the market, the seller needs to be convinced that you, the buyer, will uphold your commitment. They don’t want to negotiate for 30 days with their house off the market only to find out that you are not a serious buyer. They may have missed other offers or worse, missed the peak selling time!
So, after you deposit your money You may ask, “Is the Earnest money Deposit refundable?” It could be if certain terms and contingencies of the contract are not met. A typical purchase contract will have an appraisal contingency that states the offer is cancelled if the home doesn’t appraise. Another might be that the buyer can’t get financing or the title may have issues that prevent transfer. All of these should be stated in the contract and time limits set for the buyers and sellers to release these contingencies to keep the transaction moving forward. Every state is different and have different laws regarding keeping or refunding the Earnest Money. Your REALTOR will be able to help clarify these contract terms.
The amount of the Earnest Money will vary according to individual markets and state laws but it’s typical to see 1-5% as the going amount. Some sellers will ask for a dollar amount rather than a percentage; $5000 or $10,000. As a buyer in a hot market where there are multiple offers, you may want to offer a higher amount or even indicate that you will make it non-refundable! This is a risky move but in some cases could work to get your offer accepted.
And finally, your Earnest Money should be deposited with an escrow company or certified third party and not sent to the seller directly. The EMD will go to the seller at the closing of the contract and will count towards the down payment amount that may be required if you are getting a loan.