The Definitive Guide to Earnest Money Deposits: Everything You Need to Know

When buying a house, there are many factors to consider. The earnest money deposit is one of them that most homebuyers overlook. This unique deposit payment protects the seller if you back out of the transaction and verifies your interest as a serious candidate. We’ll discuss what an earnest money deposit is, how it works, and why it’s essential to the home buying process.

What is an Earnest Money Deposit?

An earnest money deposit is a deposit made by a buyer to show that they are serious about buying a property. The deposit is typically held in escrow by the real estate agent or title company and is applied to the home’s purchase price at closing.

How is That Different Than My Down Payment?

The earnest money deposit is different from your down payment in a few key ways. Firstly, the earnest money deposit is paid at the beginning of the home buying process, unlike the down payment, which is due towards the closing of the deal. Secondly, the Earnest Money Deposit is usually non-refundable if you back out of the agreement. While (contingency dependent), your down payment is typically refundable to the buyer if the deal falls through. Finally, your EMD will be significantly less money than your down payment and will be due earlier (more on that below.)

Typically, How Much is an Earnest Money Deposit? When is it Due?

The Earnest Money Deposit (EMD) is typically between 1% and 3% of the purchase price, but this can vary depending on the market conditions and the seller’s expectations. Your EMD is due right after you make your offer on the house and typically marks the beginning of the home buying transaction. Some sellers will require the receipt of your EMD to begin moving forward with you as a buyer but consult your real estate agent on each transaction.

Can I Lose My Earnest Money Deposit?

Yes, the EMD protects the seller from frivolous offers or non-serious buyers. If you (the buyer) back out of the deal, you will typically forfeit your Earnest Money Deposit. However, there are some circumstances where you may be able to get your Earnest Money Deposit back:

  1. If the seller backs out of your transaction.
  2. If the home presents a significant issue within your inspection phase (read our piece on guide on inspections here).
  3. If the financing/loan verification phase falls through and you cannot secure financing to purchase the home.
  4. Any specific exit clause you and your realtor put into the accepted offer.

While a down payment isn’t always required in every house purchase, it is wise to have one. As a buyer, it’s critical to understand the specifics of your EMD and be completely dedicated to a property before paying your EMD.

The Best Ways to Protect Your Earnest Money Deposit?

The Earnest Money Deposit is an integral part of the home buying process and should be protected. Here are a few tips to help you protect your earnest money deposit:

  1. Get everything in writing: Make sure you have a written agreement between you and the seller outlining the earnest money deposit. This will help to protect you if there are any disputes.
  2. Use a reputable escrow agent: Choose an experienced and reputable escrow agent to hold your earnest money deposit. This will help to ensure that your earnest money deposit is protected and that the transaction goes smoothly.
  3. Do your homework: Be sure to do your research before you make an offer on a home. This includes getting a home inspection and making sure that you are comfortable with the property.

Making an earnest money deposit is a big decision and should be done carefully. However, if you do your research and work with a reputable agent, it can help to protect your investment and make the home buying process go smoothly.

Looking to Buy a Home, Then Let DoorTru Guide You Through

The home buying process can seem daunting, but DoorTru is here to make your home buying experience smooth. We’ll guide you through the entire process, from finding the right property to closing on the deal.

A conversation with our highly experienced professional can simplify your whole home purchasing experience, no matter if you’re considering it or on your fifth open house. Book a no-obligation consultation below today!