Earnest Money (What is it & How to Protect It)

Earnest Money (What is it & How to Protect It)

You’ve finally found your dream home and you’re getting ready to make an offer. It’s an exciting time! Congratulations!


Before you submit your bid, it’s important to understand what an Earnest Money Deposit (EMD, or even Initial Deposit) is, how you can use one to strengthen your offer, and how to protect your money should anything come up during your home-buying process.


Expetitle has you covered. Here’s what you need to know:


What’s earnest money?

A good faith deposit, also known as earnest money, is money that accompanies your offer and tells the seller that you’re serious–earnest about your bid.


If you back out of the deal for any reason that’s not covered in your contract, you could lose your earnest money deposit.


EMD’s are not legally required, but sellers can contractually require them. Essentially, an EMD is an incentive for the seller to accept your bid and remove their home from the market.


Determining your earnest money deposit

Your EMD can make or break your offer, especially when there are multiple bids involved. A seller is more likely to accept an offer with a higher EMD, because by putting more money on the line, the borrower is showing that they’re serious about closing on the home.


How much you can expect to pay

In some markets, an earnest money deposit can be as little as $500 to $1000. In most states, EMDs are typically 1% to 3% of the total purchase price. In higher-priced or competitive markets, deposits can reach up to 10%.


Ultimately, the amount and type of EMD will depend on local laws and customs in the market where you’re buying, not to mention the individual preferences of the seller.


Don’t risk your money: The risk of having to forfeit your EMD is why putting down a large deposit can be risky. You should determine your EMD offer by working closely with your real estate agent. A quality agent will be well-equipped to help you put down the optimum amount and make sure you’re doing everything possible to protect your money.


Who receives and holds earnest money deposits?

You should never be required to hand an EMD check directly to the seller. Instead, expect to transfer the money to a third-party firm that provides real estate escrow services.


Make sure the earnest money is held with an escrow company whose reputation and licensing you can easily check. Your deposit money should always be held in a trust account, maintained separately from other accounts.


How you can protect your earnest money deposit

While most residential real estate transactions go smoothly, snags in the home sales process are a fact of life, and they can derail your deal.


You should avoid backing out of a deal for reasons not covered by your purchase contract. If you do, you may have to forfeit some or all of your EMD.


Here are a few ways to avoid the possible loss of your earnest money:


Understand your purchase agreement

It’s critical you know what your contract covers in detail. This is why we recommend engaging a  top real estate agent or attorney when entering into a purchase transaction. 


Your contract should provide all parameters for getting you to the closing table, plus the terms under which your EMD will be credited back or returned to you. Don’t be afraid to ask questions about anything you don’t understand.


Avoid making multiple purchase offers

In a hot market, you might be tempted to make multiple offers. However, playing this numbers game could be legally and financially risky.


In some states, this could violate the good faith and fair dealing covenant in contracts, especially since your deposit is only valid for one contract.


Shield your deposit with contingencies

Most purchase agreements contain contingencies to ensure critical aspects of the transaction are successful.


A contingency means the closing of the transaction will be contingent upon certain contract terms being satisfied. Some common contingencies are financing approval, appraisal value, and satisfactory home inspection.


If contingencies are in place but can’t be satisfied, you should still be able to have most or all of your EMD returned to you.


Check your state and local laws about earnest money deposits

This article should help you begin your research on EMDs and how to protect your deposit, but it’s important you understand the laws and customs specific to the market you are interested in.


Real estate law is complicated, and sometimes, a state or locality has obscure laws related to EMD’s. Qualified real estate or legal professionals are your first line of defense for protecting yourself from earnest money deposit trouble. Use them early, often, and wisely.


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