If you plan to buy a house soon, chances are you have been searching online…
If you are in the process of searching for a home, chances are the term earnest money deposit has come up. What exactly is this deposit and what does it get you? Is it required to purchase a new home?
What is an earnest money deposit?
An earnest money deposit is the amount of money that you put down to have an accepted purchase contract on a new home. It represents actual tangible money that you are willing to deposit as a form of security.
Some sellers require it, some don’t. It is not unreasonable for a seller to ask for an earnest money deposit to make sure that you are a serious buyer with real intentions to buy their home. Otherwise, you could make countless offers, sign all the contracts, and walk away without any ramifications to you. An EMD is security for the sellers that they should go ahead and sell their home to you, rather than keep it on the market.
Feeling comfortable making an EMD
You may wonder exactly where your earnest money deposit goes. That is a very important question to ask your realtor. Your EMD should go to a reputable escrow or title company and never to the seller directly. Always ask for a receipt for your records. Because your EMD will eventually be used towards your down payment (or closing costs if you are financing 100% of your home mortgage), you want to make sure that the number is correct when it comes time to close, or buy, the home.
Before providing any funds or signing any contracts, you should make sure that the everything is specified in writing in the contract itself. This includes under what circumstances your EMD will be refunded if the sale does not happen, where the funds will be held in escrow, and how much the EMD will be.
Always protect yourself by asking questions. It is fairly common for buyers to be asked to provide an EMD to show they are serious about purchasing the home. But the details of how it will be handled should always be transparent and clearly laid out in the contract.