A Beginner’s Guide to the Earnest Money Deposit

When buying a home, many unfamiliar terms and concepts exist. One of the first terms you’ll encounter is the Earnest Money Deposit (EMD). What exactly is it, and what do you need to know?

The Earnest Money Deposit is a sum of money the Buyer pays the Seller to show their seriousness in purchasing the property. Included in the offer to purchase is the Earnest Money Deposit. The Buyer’s real estate agent delivers the EMD to the Settlement Agent when the Buyer and Seller agree on the terms of the purchase contract.

Understanding The Earnest Money Deposit

However, the EMD remains in an escrow account, managed by a lawyer or settlement agent, until the completion of the contract terms or a mutually agreed upon early release. Once the final documents are signed, the keys exchanged, and the finalization of the sale takes place, the Settlement Agent releases the Earnest Money Deposit to the seller along with the proceeds from the sale.

Using The Earnest Money Deposit To Compete

In today’s real estate market, buyers face fierce competition for their desired properties. One strategy to help buyers stand out and increase their chances of winning a bidding war is offering a larger earnest money deposit. The EMD is the money a buyer pays when offering to show their commitment to purchasing the property. Here are some clever ways to use a larger EMD to compete against other home buyers in a competitive market.

Offer a Higher Deposit Percentage

Offering a higher deposit percentage can show the Seller that you are serious about purchasing their property. Typically, a 1-3% deposit is standard, but increasing it to 5% or more can give you an edge over other buyers. This shows that you have more skin in the game and are willing to take on more risk to secure the property. We recommend this tactic even if you are trying to purchase a home with no money down. In this case, you actually get your EMD refunded to you at closing.

Refundability

Refundability of EMDs varies based on the terms of the offer to purchase. Some EMDs are refundable, meaning the Buyer gets their money back if the deal falls through due to issues like home inspection problems, lack of financing, or other contingency reasons. If the Buyer uses a contract contingency to cancel the contract, the Settlement Agent returns the EMD to the Buyer.

How Can A Buyer Lose The Earnest Money Deposit?

On the other hand, non-refundable EMDs are given to the seller regardless of whether the sale goes through. If the Buyer cancels the contract and does not purchase the property, the seller keeps the EMD.

How Can A Buyer Protect Their Earnest Money Deposit?

Our Team at USA Lending is 100% confident in our ability to perform and fund loans when we issue a preapproval letter. We stand behind our word with a guarantee of up to $6,000.00 if we issue you a preapproval letter and cannot fund your loan. To protect yourself from losing your earnest money deposit, use our exclusive Buyer EMD Guarantee Program.

Conclusion

It’s essential to carefully review and understand the terms of the EMD when making an offer on a property. A real estate agent can help you better understand this process and ensure that you fully comprehend your obligations and rights regarding the EMD. Once you understand the EMD, you can confidently navigate the home-buying process and avoid surprises.