What is an earnest money deposit (EMD)?

In a nutshell:

An earnest money deposit is the initial deposit a buyer is asked to put down once a seller accepts their offer. It shows not only that the buyer is serious about buying, but that they are also willing to put their money where their mouth is. EMD is also referred to a as “good faith” deposit.

What you need to know:

  • The standard amount for an EMD can vary by state. For example, that amount is 3% of the purchase price (ex: $15,000 on a home valued at $500,000) in California and Washington. While in n Illinois and Texas, an EMD is typically 1% of the purchase price.
  • Offers could include a lower EMD amount, but this could make sellers uneasy regarding a buyer’s willingness or intention to complete the purchase.
  • In the case of probate and auction sales, buyers may be asked to give a larger EMD amount.

Can you get your earnest money deposit back?

In some cases, yes!

When you make your offer, you can include “contingencies” which are time periods under which certain factors allow you to back out of the contract without losing your EMD. Common contingencies are inspection contingencies (the ability to back out if you inspect the house within a certain time period and don’t like what you see) and appraisal contingencies (the ability to back out if your lender’s appraisal is not equal to the sale price).

How might you lose your earnest money deposit?

Since an EMD is a “good faith” commitment to buying the property, you will be penalized if you back out of the purchase contract for any reason not covered by contingencies (e.g. buyer’s remorse, cold feet, or a change of heart). If this occurs, you will forfeit your earnest money deposit to the seller. In some states, you could also be subject to being sued for specific performance (i.e., to force you to go through with the sale) so it’s important to carefully review all of your options before withdrawing from the agreement.

Related Buyers FAQs

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