The time has arrived. You’ve found the home of your dreams and are prepared to make an offer. Now what? All real estate contracts must be in writing and a seller will not accept a formal offer without an Earnest Money Deposit (EMD). Earnest money is a deposit made to a seller showing the buyer’s good faith to proceed in a transaction. The EMD is an important part of the home buying process as it confirms to the seller that you are a legitimate and committed buyer. Without an EMD, a buyer could potentially make offers on several houses taking them off the market until they decide on their favorite.
How much should the EMD be?
Typically, in the metro DC area, the EMD ranges from .5 percent to 3 percent of the total purchase price. In areas where homes aren’t selling as quickly, the seller may ask for the lower EMD percentage range. Alternatively, in markets that are in high demand, the seller may ask for closer to 3 percent for the EMD. The amount of the EMD varies from state to state so be sure to ask for guidance from your Realtor.
Who holds the EMD?
It is recommended that you give your Earnest Money Deposit to the title company. In most cases, this occurs within two days after the offer is accepted and the purchase agreement is signed. I highly discourage giving your EMD directly to the seller. It could be difficult or impossible to retrieve it if something goes wrong. The title company will hold your EMD funds in escrow (a trust account) until the home sale is closed. On closing date the title company will release your EMD funds from escrow and apply them to your down payment on your new home purchase.
What happens to my EMD if the deal falls through?
Generally, as the buyer, you will have contingencies in place to protect your EMD. Contingencies allow for the buyer to cancel or void the contract due to issues like:
- The house is appraised for less than the sale price – Your mortgage lender will request a third party appraiser to appraise the property you are purchasing. If the appraised value is lower than the contract price, the lender will only loan you up to a pre-qualified percentage of the loan amount. With an appraisal contingency, the buyer has the right to purchase the home at the contract price or appraised value. At this point in the transaction the buyer will either renegotiate the terms of the contract, or void the contract and have their EMD returned.
- Unable to secure financing – A financing contingency allows you to get your EMD returned if you are unable to find a lender who will provide the mortgage loan within a certain period of time.
- A poor home inspection – Most home sales are contingent upon a passing home inspection. If your home inspection uncovers major flaws you can either renegotiate for a lower sale price or void the contract and walk away with your EMD.
These are just a few of the terms that allow buyers to walk away and keep their EMD. It is important to note that as the buyer, you will want to make sure that your purchase agreement details how a refund will be handled should your deal fall through. Partnering with an experienced real estate agent ensures that you have a knowledgeable resource in place throughout your home buying experience.
For all your real estate needs, please contact Belinda Jacobson-Loehle at Jacobson Realty and Home Staging today.
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Belinda was wonderful to work with. She is very professional and knowledgeable, but also charming and totally focuses on you and what you want and need. She was extremely helpful to me as a first-time buyer, endlessly answering questions and always available when I would need to talk. This was a huge step for me and one I had waited years to finally accomplish. I appreciated the manner in which she gave me guidance but didn’t push me in any direction when it came to making choices or decisions. She was able to find me a sweet condo where I can sit outside and listen to nature, not traffic, but also close to shopping, and the other necessaries. I am very happy to say that I am now a proud homeowner, but I would have never made it through the entire process without her sustaining support and confidence. Belinda is the best and I highly recommend her whether purchasing or selling your home.
-Evelyn Runaldue
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