When preparing to buy a home, your financial priorities should include saving enough for a down payment, setting aside money for the inspection and appraisal, getting pre-approved for your mortgage, figuring out your monthly payment, etc. 

But there is another financial responsibility that can sometimes be overlooked – the earnest money deposit (EMD).

What is an earnest money deposit?
An EMD, also known as a good faith deposit, is the cash a buyer offers to show a seller they are serious about purchasing a property.

In exchange, the sellers take their home off the market while the transaction moves toward closing. If the deal falls through for whatever reason, the seller must relist the home and start over. Without an EMD, a buyer could make offers on several homes, essentially taking them off the market until they decide which one they want.

How much is an EMD?

Your earnest money will typically either be a percentage of the purchase price or a fixed amount. If the earnest money amount is percentage-based, you’ll usually pay between 1% and 3%. However, in highly competitive markets, buyers may offer larger deposits to help their offers stand out.

“Ultimately, the deposit amount is determined by the parties,” said Lisa Haun, account executive and owner of Transnation Title Agency. “Currently in our market I am seeing typical deposits between $1,000 and $3,000.”

When do I hand over the money and where is it held?
Haun says that in most cases, the EMD is due after your offer is accepted and you sign the real estate purchase agreement.

“It’s typically paid and deposited within 24 business hours of the fully executed agreement,” she said. “Most deposits are made payable to the title company but sometimes the buyer’s real estate agency will deposit them until the closing.”

The EMD is usually held in a trust or escrow account, and if all goes well with the contract, the deposit is used toward the buyer’s down payment and closing costs.

Can I get my EMD back?
Most purchase agreements contain contingencies to ensure critical steps of a real estate transaction are successful. Adding contingencies means the closing is contingent upon the satisfaction of certain terms – financing approval, appraisal value, a satisfactory home inspection, etc. If a deal falls through because one of these contingencies is not met, buyers are typically able to reclaim their EMD.

However, in highly competitive markets, it’s becoming more common for buyers to waive certain contingencies in order to gain advantage over other buyers. While it can definitely make your offer more attractive, it can put your EMD at risk. 

For instance, if a contact includes an inspection contingency, a buyer can back out of a deal – and take their EMD with them – if serious issues are found during the inspection. Without that contingency, a buyer can still walk away, but they’ll likely forfeit their deposit.

Also, keep in mind that many real estate contracts set a timeframe in which a buyer needs to secure financing, get an inspection, have the house appraised, and be available for the closing. If your contract includes a timeliness clause, and you’re at fault for significant delays, you could be in breach of the contract and you may forfeit your EMD.

“A buyer will also lose their deposit if they simply have a change of heart and decide to back out of the deal,” said Haun. “The seller gets to keep the deposit as compensation for the time and money they will spend finding another buyer.”

How can I protect my deposit?
When making an offer and submitting your EMD, it’s important that you’re fully informed and that you understand your contract and the included contingencies.

“If the earnest money is held by a title company like Transnation Title, we require that a Mutual Release is signed by both parties,” said Haun. “This specifically states who the EMD goes to and it must be mutually agreed upon by both the buyer and seller.”

To help ensure your financial interests are protected, it’s best to work with trusted, local professionals. You can find a list of experienced REALTORS®, lenders, title companies, and more by visiting the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com.