What Is Earnest Money?

After you go under contract on the purchase of a home, the next step is to make your earnest money deposit (EMD). This is the first part of your down payment on the home that is held by a third party, often a title company or real estate attorney. It is a key part in the transaction process and it is also your first requirement to move forward with your offer on the property. 

What is Earnest Money?

• Simply put, earnest money is a deposit made by a buyer to demonstrate their genuine interest and commitment to purchasing a property. It serves as a tangible assurance to the seller that the buyer is serious about the deal.

Why is Earnest Money Significant?

• Demonstrates Commitment: Earnest money signals the buyer's seriousness by building trust with the seller. It shows that they are willing to put up money in order to move forward with the purchase.

• Seller Protection: It compensates the seller if the buyer backs out without a valid reason, covering potential financial losses and the hassle of taking the home off of the market and then having to put it back on. It is important to work with your agent to discuss what kind of contingencies you would like to attach to the offer in order to avoid losing your deposit. Common contingencies include a home inspection contingency, a home loan approval contingency, and a sale of current residency contingency. If the home inspection reveals a problem, your lender rejects your loan request, or if you cannot sell your current home then you can use the corresponding contingency to back out of the deal while recovering your deposit. 

• Negotiation Tool: The amount of earnest money can influence negotiations, potentially leading to a more favorable deal for the buyer. The more money that you put down, the more serious that the seller will generally think that you are about following through with the contract. 

How Much and Where?

• Typically, earnest money ranges from 1% to 3% of the property's purchase price. It's held in an escrow account, managed by a neutral third party like a real estate attorney or title company.

What Happens to It?

• Earnest money is typically credited toward the buyer's down payment and closing costs during the transaction. It may be forfeited to the seller if the buyer breaches the contract, but contingencies can protect the buyer.

At the end of the day, your earnest money deposit is another factor of your offer on a home that your agent will advise you on so that you can submit a competitive offer that is likely to land you the home. If you have any questions about this process or are ready to start shopping for homes and submitting offers, reach out to our team today! They have years of experience negotiating offers for home buyers in the area and would love to advise you on the current market conditions. 

To learn more about earnest money, take a look at this article from Redfin.com.