Like any other specialty, real estate conversations come with their own lingo.  While Realtors® may explain something to a client using this lingo, it is important for them to make sure that the clients know exactly what is being discussed.  The earnest money deposit, also referred to as an EMD or just earnest money, is one of those terms.

What is an earnest money deposit?

An earnest money deposit is part of an offer that a buyer writes for a house.  In order to show that the buyer is serious in wanting to purchase the home, the buyer offers the seller an earnest money deposit that is usually about one percent of the sales price. 

It is important for all buyers to know that an earnest money deposit is not part of the down payment for a house. It is a separate expense.

Do I have to actually write a check for the earnest money deposit?

Some people get confused about this because you don’t have to actually write the check until your offer is accepted.  If you’ve ever written an offer on the home and it was not accepted, then your Realtor® did not have to ask you to send the earnest money deposit to the escrow account (usually a title company) that holds the money.  

If you write an offer and it is accepted, you usually have about five days to get the money to the escrow account.  If you do not send the earnest money deposit, then you are in breach of your contract and in danger of losing the house.

Who holds my earnest money?

Usually a third party, like a title company, will hold the earnest money in an account for you.  This money stays in the account until closing day. 

Do I get my earnest money deposit back?

When you close on a home, the earnest money goes towards the down payment or other closing costs.  You will see how it is used on the closing disclosure that the title company will share with you a few days before you purchase your new home.  (A closing disclosure is like a balance sheet for the buyers and sellers that breaks down all the costs with purchasing the home and how money is being spent to cover these costs.)  Your money will not physically be returned to you.

What happens to my earnest money deposit if I don’t buy the house?

There are contingencies in the contract that allow for a buyer to not purchase a home.  A home inspection or appraisal contingencies that reveal issues in the home that the buyer and seller cannot agree upon open up an opportunity for the buyer to exit the contract.  As long as a buyer has followed the contract, then the earnest money deposit should be returned.  However, if a buyer does not follow the guidelines in the contract, then the buyer is at risk of not receiving the earnest money deposit back.  For example, if two days before closing, a buyer suddenly decides that he doesn’t want to purchase the home anymore and refuses to sign the paperwork, then the buyer may not get the earnest money deposit returned.  Why?  Because there is not a contingency in the contract that states that the buyer can exit the contract because he changed his mind.

Do you have more questions about an earnest money deposit or other real estate related things?

I’m happy to help answer them! Send me a message!