Earnest Money Deposit Explained: Key Facts Every Homebuyer Should Know

All about earnest money and what it's all about. So a lot of questions that I get about earnest money from my buyers, and they're all very good questions. The first one is, what is earnest money? Do I have to put earnest money down? What happens to my earnest money once I do put it down? Can I lose my earnest money deposit if I buy the house? Does my earnest money deposit go toward the purchase of the home? When is my earnest money deposit due? So let's start answering these questions all about earnest money. So what is earnest money? Well, an earnest money deposit, and we abbreviate that in realtor jargon as an EMD, earnest money deposit. It's often called good faith money. It's an initial payment you make when you submit an offer to purchase a home. Think about it as a way to show the seller how serious you are or how earnest you are about buying their property. It is a way to signal to the seller that you are serious about purchasing the property. Sellers often feel more comfortable accepting offers that include earnest money deposits because it reduces the risk that you'll back out without a valid reason. We'll get into backing out later. Next, do I have to put an earnest money deposit down? Is it required? It's absolutely not required, but it's also not required that you get your offer accepted. Okay, so there are things that are required and then there are things that are just generally accepted. And my advice would be, it would be rare to have a seller accept an offer without an earnest money deposit. So you don't have to do it. You do not have to put an earnest money deposit down. There is no requirement that you put an earnest money deposit down on the purchase of real property. However, it is customary, as I said before, and is usually done. So sellers typically expect it. What's my advice? It really depends on whether you're competing against another buyer or not, how bad you want the property, and whether you know the seller or not. If you are competing against other buyers, my advice is to put a good chunk down for your earnest money deposit because again, it signals your commitment. You have skin in the game, so to speak. If this home is more of a stop-off point and, or you could kind of take it or leave it type of a thing, then I'd recommend putting as little or nothing down in earnest money as possible for you to reduce your risk. If you know the seller well and the seller trusts you, an earnest money deposit may not be necessary. But if you don't know the seller, remember, the earnest money deposit is one of the first impressions that the seller is going to get of you. So they will make judgments about you based on the amount of your earnest money deposit. So if you're competing against other buyers or you really, really want the home, Remember that the amount of your earnest money deposit is really their first window into you as a buyer and your level of earnestness and your level of seriousness in purchasing their home. All right. Next question. When is earnest money deposit due? It's really up to you in the purchase agreement or the buy-sell agreement we use in our area. There are two options. One, it's due at the time of the offer. Or two, it's due within a certain number of business days after a fully executed agreement has taken place. In other words, a fully executed purchase agreement means when both parties agree to the terms outlined in that purchase agreement or buy-sell agreement, and the both parties have signed that contract. When I'm working with clients, I prefer using the number of business days after a fully executed agreement. Usually I do about 3 to 5 business days depending on the buyer's location and ease of being able to write a check or wire the funds to the title company. I do not want to handle earnest money deposits. I, as a broker, I rely on the title company to do that, so I will get that all set up. I also don't really want to do it at the time of offering the purchase because you've got to write a check out. I've got to hold this check. I don't really want to be dealing with earnest money deposits just from a liability standpoint. And I want you as a buyer to understand that because I'm not holding your money in escrow, it's really up to that third party, that title company. That's who holds the earnest money deposit in escrow. So after you write that and you give it to the title company, it's being held in escrow. What happens to it? Well, once the seller accepts your offer, the earnest money deposit is deposited in that escrow account. It's a secure account managed by a neutral third party. In this case, in, in my buyer's client's case, that is the title company. There are some brokerages that act as that neutral third party. I don't think that's really technically can be considered a neutral third party, but there are some brokerages that hold earnest money deposits. I don't do it. I have the title company do it. Okay. Hey, if you're enjoying the content here on the channel, would you do me the favor of considering subscribing to the channel? It costs you so little. It means so much to us to have that kind of support. All right, let's get back to the video. It's held there until closing and acts as a financial placeholder in the process. By the way, if you're confused about the term escrow, Escrow can refer to what I'm talking about, about holding your earnest money deposit check in escrow. When you get a loan to purchase a property, you can also have your homeowner's insurance, your taxes escrowed and then paid out of an escrow account. So escrow can mean a number of different things. If you're curious about wanting to dig into that term a little bit more, check out my video, the video card above where I go into detail about the word, what the word escrow means in real estate. All right, as far as your earnest money deposit being credited toward the purchase, if everything goes smoothly and you close on the home, this earnest money deposit typically goes toward your down payment or your closing costs. Okay. Now, as it relates to refund or the forfeiture of your earnest money deposit, If something in the purchase process falls through due to issues covered by contingencies, like, you know, remember what contingencies are, and I've shot a separate video on contingencies. Check it out in the YouTube card above. But you have contingencies like the offer is contingent upon securing financing. The offer is contingent upon satisfactory inspections. The offer is contingent upon appraisal. The offer is contingent upon the successful sale of the buyer's current home, etc., etc. There are lots of things that you can write in as contingencies. Home inspection and financing are the typical one, and appraisal is really kind of inside of that financing contingency anyway. If the deal falls through, you're usually entitled to getting your earnest money deposit back, although you need to understand this, this is not just a given. Both the buyer and the seller have to mutually agree to refund the earnest money. I haven't experienced it, nor have I heard about an instance where if one of the contingencies was not satisfied— in other words, you weren't able to get financing or you weren't satisfied with the inspections— it's been— all of my experience says that you get your earnest money deposit back. But it wouldn't surprise me if there's one seller in a million out there who would choose to be a little stingy with just signing off on that, what's called a mutual release. Okay, it's a legal document that when deals have fallen through, and this has happened to me on a number of occasions where my buyers didn't like a home inspection, they felt like they were going to have to put way too much into the property and the seller wasn't willing to reduce the price or fix the issues themselves. So then we back out of the deal, and we do— to get the earnest money deposit back, we do fill out and both parties sign a mutual release. Then that mutual release is delivered to the title company, and that's the trigger for the title company to release those earnest money deposit funds back to the buyer. Now, there are some times where the seller could try to keep the money as compensation for taking their home off the market during the time that it's under contract. Still, technically, this has to be mutually agreed upon, or the earnest money stays in escrow until and unless both parties agree to the terms. Okay, so it can just be in limbo. In fact, I've got a deal going right now where I was representing the seller, and, uh, purchase, uh, offer to purchase was made. All it was, a cash offer, so there was no financing contingency. The only contingency was inspections. And then what happened with that particular buyer is after the inspection contingency was satisfied, so that inspection period elapsed, it was 10 days, on day I think it was 13 or 14, that buyer suffered complications from a medical procedure and needed to back out of the deal. And right now, neither the buyer nor the seller have agreed what to do with that earnest money deposit. And so it sits at the title company until and unless both the buyer and seller agree what to do. It could go— it's— and that's another negotiation, right, that needs to take place. They could split it 50/50. The seller could be gracious and give it all back to the buyer, or the buyer could also surrender it all. There are lots of different options that can be handled. It doesn't go on and on and on forever. Eventually the title company will get impatient about just having money sitting on its books, and it take— can take it to the next level. But that's kind of beyond the scope of this video. But just know that you're not 100% guaranteed that if you pull out of the deal within your contingencies of getting that earnest money deposit back, there is a very small chance that that seller could be pretty stingy with it. And you just need to be prepared for that very unlikely event. But at the same time, you don't want to have your money tied up, all of your money. You've put all of your eggs in that basket, and that could hold you up then from, um, if you want to move on to a different home. You won't have money to put down on that future home because it's still tied up here with a stingy seller who won't sign the mutual release to give you your earnest money deposit back. That, as I said, that is a horror story. I don't want to inject you with fear. It's very, very rare, but I also would be remiss in not letting you know the particulars about what is the worst that could happen. In short, the earnest money deposit helps make your offer stronger and protects both the buyer and seller during the buying process. It's your way of saying, "I'm serious about your home."