When writing an offer on a property, an earnest money deposit is typically included with the offer. The earnest money deposit or EMD as real estate agents call it shows that you, the buyer are serious about your offer on a property.
This money is a pledge showing the seller you are 'earnest' about your offer.
While not a requirement, it's customary to indicate on the contract that an earnest money deposit is included. In most parts of the country, the earnest money deposit will be between 1% and 5% or more of the purchase price. This money is held in the buyers' name in an escrow account. The funds become part of the overall closing costs and/or downpayment for the buyer.
Who holds the earnest money deposit?
In the Greater Washington DC/Baltimore area, it is the home buyers' choice as to who holds their earnest money deposit. The earnest money deposit can be held by the buyer's brokerage or a neutral settlement office or attorney. This money is at risk if the buyer defaults on the real estate transaction.
How can a buyer default on a real estate transaction?
A home buyer is in default when they do not meet the terms of the contract. As protection, the buyer should include contingencies in the contract offer. The contract spells out how a buyer can be in default so it's critical that the contract offer is thoroughly reviewed before signing.
Contingencies are steps the buyer needs to take in order for the contract to be fully valid. A home inspection contingency, appraisal contingency, and financing contingency are time-sensitive items in the contract that need to be completed by the home buyer. They are also ways the buyer can void the contract if for example the buyer and seller do not come to an agreement after a home inspection.
In a competitive situation, a buyer may choose to waive one or two of these contingencies. If you are considering this option, please discuss this plan with your lender and agent as it puts you at risk.
Back to the earnest money deposit
Again in competitive situations, the higher the earnest money deposit the more appealing the offer. Remember the seller will take their house off the market and choose to work with you. By putting down a higher earnest money deposit, you are showing the seller you're serious and a good choice. This also indicates your commitment to completing the details of the transaction.
One final note, the earnest money deposit is typically deposited within two and five days after the contract is ratified. (all parties agree to the terms of the contract) This means the buyer has several days to wire the funds to the buyer brokerage or settlement attorney's office.