What is the earnest money deposit and how much will it be?

Last month we wrote a post titled 'We Have An Accepted Offer...Now What?!' where we covered a lot of the important steps in the home buying process after getting an accepted offer. We answered common questions such as, "What is the time frame from an accepted offer to the closing table?" and "What are the things I will need to pay for out of pocket after the offer has been accepted?". In this post we are going to dive deeper into a very common element of the home buying process: the earnest money deposit. 

What is the earnest money deposit?

The earnest money deposit (EMD), also known as the good faith deposit, is a sum of money that is paid to the seller by the buyer. It's known as a good faith deposit for a reason: it shows the seller that you are a earnest/serious buyer by becoming somewhat invested in the home. The EMD goes toward the purchase of the home and becomes part of your investment in the property. 

How much should I expect to pay for the earnest money deposit?

The amount of the EMD will depend on the purchase price of the property; the more expensive the property, the higher the EMD will most likely be. A good rule of thumb to determine the amount of the EMD is to pay 1% of the purchase price. For example, if it's a $200,000 home, generally the EMD will be $2,000. Keep in mind, however, that the amount of the good faith deposit is negotiable. Many times your agent will recommend a lower amount to help decrease the liability that falls on you during the real estate transaction. By requesting that the earnest money be $500, for example, instead of 1%, this helps the buyer if they need to breach the contract and get out of the deal. They will then only lose $500 as opposed to 1%, which will usually be higher. 

Are there any situations that exist that would allow me to get the deposit back?

Yes, there are two contingencies in the contract that will allow the earnest money amount to be returned to you. The first contingency is the home inspection. If the home inspection is completed in the allotted time and any issue comes up that the buyer is not comfortable with, the buyer is entitled to exit the deal and have the EMD returned. 

The second contingency is the appraisal. The buyer's lender will send a licensed appraiser out to view the property and give an objective opinion on property's value. If it's a $100,000 property and the appraiser determines the value to be $95,000, the seller can come down or the buyer is entitled to exit the deal and have the EMD returned.

Where is the earnest money held?

Most of the time the earnest money check is held in the escrow account of the buyers agent's brokerage. This is, however, also negotiable. Holding the earnest money check in the buyers agent's brokerage makes it easier to access if it needs to be returned to the buyer. 

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