You’ve done all the right things, you’re out daily looking for your place to call home. You come across the ONE, you’re ready to make your offer and your Realtor says…
“Along with your offer we’ll need your pre-approval letter, which I have, and your Earnest Money Deposit”.
Record Scratch… What’s an Earnest Money Deposit?
I’m Real Estate Broker Tyson Reeves and I’ll be breaking down
- What an Earnest Money Deposit is
- What it’s for
- And how to protect it
An Earnest Money deposit (EMD) is a sum of money that accompanies your offer for a home AND guarantees at risk of forfeiture that you will hold true to your promise of completing the purchase.
In other words, it secures that you are serious. It’s saying that you are making your offer with full intent to purchase the home and that you’re not going to back out for any reason other than the permitted reasons addressed in the Purchase agreement.
How much should my deposit be?
Earnest Money Deposits in this area are typically between 1-3% of the price you’re offering, for example if you were offering $250,000 for the home then typically your EMD would be between $2,500 and $7,500 . However this range is only typical and not concrete, your EMD can be any amount you choose it to be, yet I warn you that it’s a negotiating factor and the more it is; the better. It can exceed 3% or be less than 1%.
An EMD is not a Down Payment, is not part of your down payment and is not extra money out of your pocket. Often people will misconstrue the EMD as a down payment because it is given up front.
Makes sense to me too, a down payment is usually given up front when making a purchase but not this time. The difference is your EMD doesn’t quite make it to the sellers hands just yet, in fact the seller doesn’t get paid one dime until the closing where they receive their due and you receive your keys!!!
As stated earlier your EMD is simply security and it is held protected from all parties in what’s called an Escrow Account. The money is in limbo there until it is released on the day of closing or dispersed in an agreed upon addendum if the deal doesn’t complete.
Your Earnest Money deposit does aid in your closing cost. At the closing table you will be required to bring the remainder of the money that your mortgage didn’t cover.
Some items that your closing cost might cover will be your actual down payment, your taxes and insurance, title expenses and things of that nature.
Your EMD will serve as a credit for money already given by you and will be deducted for the total that you need. I’ll give a simple example of this here. The numbers are made up and only used for you to get the point…
You are purchasing a home for $200,000, you gave a 2% EMD of $4,000. Lets say your closing cost totaled $15,000 (that includes your down payment). Since you have already given $4,000 as your EMD, your requirement to close will now be shown as $11,000.
Your Earnest Money Deposit can and maybe always should be used strategically! This is why it is a good idea to have a larger earnest money deposit in the beginning. 1, it assists in your negotiation and 2, its the same money used in your closing cost. So the stronger your EMD the more it increases your chances if there are other offers competing against you.
Your Earnest Money Deposit can be lost if a purchaser cancels the sale outside of its protected clauses built inside of your offer. Usually there are 2 main clauses; 1. your inspection, and 2. your ability to obtain the mortgage.
If for any reason you can not obtain the loan for your mortgage you are not obligated to forfeit your EMD. Likewise, you’ll have a set time period to have an inspection done and should the inspection reveal reasons that cause you to cancel the deal AND you put this in writing you are also not obligated to forfeit your EMD.
However you can not cancel the deal for reasons outside of these, doing so could cause you to lose your deposit to the seller. So make sure you are serious about the homes you make offers on.
Consult your Realtor on any serious and detailed matter concerning your Earnest Money Deposit, although losing an EMD doesn’t happen very often, it does happen and usually it could have been prevented.
Any questions, I can be reached thru this site or any of the social platforms. @AgentReeves