Earnest Money Down (EMD) in a Real Estate Transaction - Explained!
Investing in your dream home is indeed an amazing feeling. However, doing so requires a whole lot of process beforehand. During this process, you might have heard about earnest money down. Are you wondering what it is and how it works?
When purchasing a new home, you are asked to submit various documents and an additional amount as a security deposit. This depends on the property you are going to purchase or can be discussed between the two parties.
To have a better know-how about it, keep reading this article till the end!
What is Earnest Money Down?
Earnest money down is a term used to describe a down payment that you as a buyer have to pay for securing a property. The down payment is typically a percentage of the total purchase price. The buyer has to provide the down payment within a certain timeframe, usually within a few days. It ensures that you're serious about a property so that a seller can mark the property as "pending" or "under contract"..
The good thing about this method is that it allows the buyer to put the house "on hold" until they get their home inspection and financing lined up.
Moreover, this makes you a serious buyer and that you are willing to make the purchase. The money is typically sent directly to a title company or real estate lawyer to be placed in an escrow account.
Example of Earnest Money
To clear the concept of earnest money further, let's have an example. Suppose Christian wants to purchase a home from Jose. Let's say the property is worth $500,000. Christian deposits $10,000 in earnest money to prove himself as a dedicated buyer. This makes it evident that Christian is serious about the property so that Jose can withdraw the listing from the MLS as active and change the status to pending or under contract.
What is Earnest Money Used for?
You might be wondering where the amount goes when it is deposited as EMD. Earnest money down is typically used to secure the property purchase. Earnest money is to assure the seller that the buyer intends to complete the sale.
Remember that earnest money down payment won't make a person owner of the property. However, the owner must remove the property or the house from the sales market during the evaluation process.
Right Amount of Earnest Money
Earnest money down payment can vary according to the property you want to purchase. Often, sales agents might ask to deposit around 1-3% of the total sale property price. Additionally, if the property is being purchased with cash, the earnest money can go up to 10% of the total sale property price.
How Can Earnest Money Down Payment Provide Protection?
Earnest money down payment can protect you as a buyer and the seller. Suppose you are a buyer and want to buy a house. In that case, EMD payment will make you stand out among other buyers.
Now, if you are a seller and your buyer backs out of the deal, then as a seller, you will get to keep the deposit. So, EMD protects both seller and buyer. However, it is important to consider the below-given points.
Read Everything Carefully
Ensure that you have read the contract thoroughly and know the dates of contingencies. These contingencies such as inspection, financing, and appraisal are mainly for the buyer's sake. If the buyers financing falls through within a certain timeframe, he can cancel the contract and get his earnest money deposit back. Same goes if the home does not appraise for certain value that was agreed upon. Usually, the property will be also contingent upon inspection. The property doesn't pass inspections, or the seller does not make the appropriate repairs the buyer may cancel the contract and get his earnest money deposit back.
You have to make sure that you're following all the rules to not lose the earnest money down payment and the property. A written agreement is the best way to protect yourself from any problems or miscommunication in the future.
You can get a piece of legal advice if you're unsure of your rights.
Make Sure the Money is in Safe Hands
As a buyer, never deposit your earnest money down payment directly to the seller. To make sure your deposit is in safe hands, it's better to involve third parties such as an escrow company, real estate brokerage or legal firm. Also, don't forget to get a receipt for your deposit.
Take Your Responsibilities Seriously
Lastly, to protect your earnest money down payment, make sure you are on time for documentation and other legal proceedings. This will also make you a loyal buyer, and the processing will be easier.
What Happens if I Change My Mind?
Almost every real estate agreement has a few contingencies that would allow you to walk out with the deposited EMD in your hands. However, if you don't abide by those mentioned contingencies and still decide to back out, then the seller will get to hold your earnest money down payment.
Situations When You Can Lose Your Earnest Money
There are other cases where you can lose all the earnest money you have deposited. These situations are discussed below.
You get cold feet or buyer's remorse
If you decide at some point, you just don't want to purchase the home the seller will be entitled to your EMD. If you find another house for sale that you like better and decide that you wish to purchase that one instead the seller will keep your earnest deposit.
Forging Out Contingencies
If you withdraw your offer for purchasing the property for any reason outside of the contingencies outlined in the contract the seller has the right to keep the escrowed money.
Final Words
Earnest money down payment, which is sometimes called a "security deposit," is basically to show confidence in the buyer and how serious they are about owning the property. On the other hand, it can also be a deposit that protects your lender if you default on your loan. In any case, make sure that you are dealing with authentic resources.