Earnest Money Deposit

Earnest money is placed into escrow by the buyer of an apartment building as a deposit to show their commitment to execute on the purchase contract. EM is credited toward the purchase at closing.

What Is Earnest Money Deposit?

Earnest money deposit is an amount that a buyer pays to the seller as a good faith deposit which assures the seller that the buyer is serious about purchasing the property. It is like a promise of purchase on the property which secures the deal between the buyer and the seller. 

A contract is drawn up that outlines the terms of the earnest money deposit. After the deposit is made, the buyer gets extra time to arrange funds, conduct inspections and learn about the property appraisal before closing the deal of purchase. If the buyer violates the terms of the contracts, he may lose the earnest money deposit.

Why Is Earnest Money Deposit Required?

For a seller, earnest money deposit is important because it shows that the buyer will most certainly purchase the property once he gets access to all the funds. It ensures that the seller is protected for holding the property for the buyer in case the buyer backs out of the deal.

For a buyer, the earnest money deposit is proof of his intention to buy the property. It gives him time to make arrangements for the funds and other requisites. The deposit also holds off other potential buyers from making an offer on the property. 

Who Holds Earnest Money Deposits?

The earnest money deposit is held by the seller’s real estate broker in an escrow account. It can also be held in escrow by a bank, third-party title company or lawyer. This deposit remains in the escrow account until the deal is closed. Based on the terms of the contract, this money can be applied to the down payment or closing costs at the end of closing the deal. 

What Is the Percentage to Determine the Earnest Money Deposit Amount?

The earnest money deposit is determined by the buyer and seller together as they can negotiate and agree on an amount. Usually it is 1% - 2% of the sale price depending on the market. In properties with very high demands, this percentage can go as high as 5%. 

In some cases, the earnest money deposit amount is fixed by the seller such as $10,000 or $15,000. The higher the deposit, the more serious the promise of purchase is. It is important for the buyer to offer an amount that is high enough for the seller to consider. Again, this amount can be negotiated.

What Is an Example of Earnest Money?

To understand this better, here’s an example. Suppose a woman wants to purchase a house that is worth $3,00,000. She wants to make an offer to the seller by offering an earnest money deposit of 2%. Now, the seller agrees to this percentage. In this case, the earnest money deposit amount will be 2% of $3,00,000, i.e., $6,000. The buyer will then transfer the $6,000 to escrow.

Is Earnest Money Refundable?

When a contract is drawn between the buyer and seller, the terms are clearly stated in the contract about the refund of the earnest money deposit. In most cases, this amount is refundable as long as the buyer doesn’t violate any terms of the agreement. 

For example, if it is stated in the contract that if the buyer is unable to get a loan then the earnest money is refunded by the seller. Also, in case the buyer finds maintenance issues and the seller and the buyer are not able to agree on who would bear the repairing costs, in that case if the buyer backs out, the earnest money will be refunded to the buyer. 

In any case, the terms and conditions of the contract should be met in order to get the earnest money refunded. 

How Is Earnest Money Paid?

A buyer can pay earnest money to an escrow account or real estate broker or a title company. The amount can be paid through a wire transfer or personal check or a certified check. 

Conclusion

Earnest money deposit is a fixed amount paid by the buyer as a promise to purchase the property after the buyer arranges funds. This money, however, is not an obligation for the buyer to purchase the property. 

It is important for the buyer to read the terms of the contract carefully and ensure that he doesn’t do anything to violate the terms. It is also important for the seller to have complete knowledge of the contract so that the amount can be refunded to the buyer in good faith. 

‍