earnest money deposit

What is an EMD & Why Do I Need it?

June 30, 2016 | Buying a Home | By: Allison

What is an Earnest Money Deposit (EMD)?

When a buyer writes an offer to purchase a home, they need to submit an earnest money deposit (EMD for short) with the contract.  They have the opportunity to submit a check to their agent along with the offer, or select an option to wire the funds or provide the check within a certain time frame after acceptance of the offer. Typically, this time frame is around two days. 

The earnest money is deposited into an escrow account by the real estate brokerage company or settlement company. It will remain “in escrow” until settlement. At that time, those funds will be credited back to the purchaser. Usually, this will off-set part of what the buyer owes for closing costs or their downpayment.

WHY DO I NEED IT?

The purpose of the earnest money deposit is for the buyer to show the seller that they are “earnest” in buying the house. In other words, that you aren’t writing a contract without the intent to actually purchase it. 

HOW MUCH SHOULD THE EMD BE?

The amount of this deposit varies based on the price of the home.  For example, for properties under $300,000 a $5,000 earnest money check would be typical. $30,000 would be about right for a house at $1,000,000. If you are writing on a new-construction property, the builder might require 5% of the sales price as the deposit. There can also be other scenarios where it would make sense to increase the amount, such as in a competitive situation or if the other terms of your offer are not very strong.

THAT’S A LOT OF CASH! CAN I LOSE THE MONEY?

This money would only be at risk if you defaulted on the contract. Buyers are in default if they refuse or unable to purchase the home by the settlement date (unless there is a contingency that protects them). If you decide to walk away from the contract “just because” – and without a contingency to give you an “out”-  you would be in default.  Contingencies in the contract protect you in case the appraisal comes in low, the roof is ready to cave in or you lose your job and can no longer afford the mortgage.  As long as you have contingencies in place and keep within deadlines per the contract, which a good Realtor will work with you to do, your money is not at risk.

Have more questions about buying?  Reach out!  We’re happy to help.

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