The earnest money deposit is a crucial part of a real estate purchase offer. The amount of earnest money offered to a seller as a good faith deposit can be the difference between getting your offer accepted and losing out on the house of your dreams. This article contains everything you need to know about the earnest money deposit.
What is the Earnest Money Deposit?
Earnest money is the initial deposit made to a seller that represents a buyer’s good faith to buy a home. It shows the home seller how serious you are about buying their home. The higher the amount of earnest money you offer, the more serious you will appear to the seller. Having this good faith deposit offers a home seller some peace of mind while the buyer is conducting inspections, obtaining appraisals, and securing financing. After all, it’s less likely for a buyer to terminate a transaction if they stand to lose a substantial deposit.
How Much Earnest Money Should be Offered?
How much earnest money you offer depends on several factors. You will want to assess factors such as your own financial situation, competition from other buyers for the same house, your commitment to purchasing the home, and the purchase price. Always keep in mind that the higher the ‘good-faith’ deposit that you offer, the more serious the seller will view your offer.
The general rule of thumb is to offer 3% to 5% of the purchase price. As mentioned above, several factors may drive that amount higher or lower. You should consult with your Realtor for advice on how much earnest money to offer. They will have a good idea of what is appropriate.
In addition to offering a larger escrow deposit, writing a thoughtful letter to the seller can help influence their decision to accept your offer over others.
Where is the Money Held?
Once your purchase offer is accepted by the home seller, you will be required to deposit your earnest money to escrow within 3 business days. The escrow company handling the transaction will be agreed upon by you and the seller as part of the purchase contract. After contract acceptance, you will be provided with the address and wiring info for the escrow company. You may make your deposit by check, money order, cashier’s check, or electronic wire from your bank. Your deposit will be held in the escrow account until the transaction has closed.
Do I get the Deposit back if the Transaction Fails?
A home buyer’s earnest money deposit is well protected by contract contingencies. This simply means that all of the terms of the contract are contingent on specific things happening. Common contract contingencies include home inspections, appraisal, financing, and clear title. For example, if your home inspector finds that the home has major electrical issues and the homeowner is not willing to correct them, you are entitled to terminate the contract and retain your earnest money. Homebuyers typically get their deposit back when a transaction goes south, while there are a few causes for forfeiting the earnest money.
Can the Seller Dispute the Return of my Deposit?
Yes, the may feel that your reason for terminating the contract is not covered by the contingencies of the contract. In this case, the seller feels entitled to keep the deposit as ‘damages’ for the time they lost not having the home on the market.
When a dispute arises, consult with the escrow or entity that is holding the deposit to see what their protocol is. It is likely that the escrow holder will have a standard procedure that follows state laws regarding this situation. We recommend that you become very familiar with how your state addresses earnest money disputes.
What Happens to my Earnest Money when Escrow Closes?
Once the transaction is completed, the earnest money amount will be credited back to you (the buyer). Simply put, you get the money back!
The EMD is a big deal. Buyers should be thoughtful about how much they offer and careful to agree to contract terms that they will be able to meet. This gives you the best chance of getting your offer accepted and buying your dream home.