If you’re familiar with the real estate process, you may have heard the term “earnest money deposit.” But what exactly is it, and more importantly, how does it affect you?
In today’s blog, we’ll be discussing the meaning of the earnest money deposit, why it’s significant in a real estate transaction, and how you can protect it.
What is an EMD?
The earnest money deposit, sometimes referred to as the initial deposit, is a good faith amount a buyer puts down to show the seller that they are serious about buying the property. In California, it usually ranges anywhere between 1-3% of the purchase price, but can be negotiated with the offer and counter offers.
As the buyer, you will be required to deposit the amount to escrow, typically within 3 business days of the contract being signed and accepted. Some escrow companies will accept a check, but most will provide secured instructions for a wire transfer. (Keep in mind that escrow will not accept ACH payments. Also, to prevent wire fraud, always make sure to call the escrow company BEFORE sending the wire, to confirm the recipient bank account information.) This deposit will be held in escrow during the entire transaction and applied towards your closing costs and down payment at closing.
Why is it important?
In order for sellers to take their home off the market and move forward with your offer, they want to be confident that you will close on the sale. The earnest money deposit is essentially your token of promise that you are sincerely committed to purchasing the property. (But that does not mean you are locked into the home. A buyer in California can cancel the agreement at any time.)
Generally, a higher amount is more enticing to the seller because it reflects strong intent and financial stability. However, this doesn’t mean that you always have to deposit the maximum amount. In a strong seller’s market, 3% is the standard. In a slower buyer’s market, 1% (or even as low as a few thousand dollars) may be acceptable. Your real estate agent should be able to advise you on what the current market conditions are and provide more insight on an appropriate amount.
Can I lose my EMD?
During a transaction, there are contingencies in place to protect your deposit. Within a certain timeframe, you have the right to perform your due diligence, conduct inspections, get an appraisal done, make sure your loan is fully approved, and confirm that everything is satisfactory. The purchase agreement includes contingency clauses stating that if any of these conditions are not met, you can back out of the deal without risking your deposit.
Here are a few of the most common buyer contingencies:
- Home Inspection Contingency: You have the right to investigate all matters affecting the property. This includes the property condition, neighborhood, environmental factors, etc. We highly recommend that you hire a professional home inspector who can point out any safety hazards or important defects you should be aware of.
- Appraisal Contingency: An appraisal is an estimate from a qualified real estate appraiser to determine what the property is worth in today’s current market. This gives you a good idea of whether the price you are paying for the home is higher, lower, or equivalent to the fair market value. If you are financing through a loan, most lenders will require an appraisal to be done.
- Loan Contingency: This contingency only applies if there is a loan involved in the transaction. Within the standard 17 days after acceptance, your lender will work to get all of their conditions met and make sure you are fully approved for your loan. If for some reason your loan does not go through, you can safely back out and get your deposit back.
- Contingency for the Sale of Buyer’s Property: Many buyers have a home they need to sell in order to buy. This contingency allows you to cancel your purchase if you are unable to sell your current home. This way, you don’t have to worry about getting locked into two mortgages or being forced to buy the home without the funds from your sale.
Once all contingencies are removed in writing, the seller is entitled to your EMD if you choose to cancel the agreement. In the state of California, even if the deposit is a larger sum of money, the maximum amount a seller can receive is 3% of the purchase price.
It is your real estate agent’s job to make sure your deposit is protected. With Park Group Real Estate, rest assured that your hard-earned money is in good hands. Our team has never lost our client’s deposit in all 20 years of serving the local community.
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