What Is an Earnest Money Deposit?
1. What is an EMD?
The earnest money deposit (EMD) is a demonstration of the buyer’s good faith to purchase a property. It is an instrument to ensure that the buyer and seller perform their obligations of the contract. If the buyer does not abide by their agreed upon obligations then the EMD may be forfeited, but if the seller does not perform their duties of the contract then it is returned to the buyer.
2. Who holds the EMD?
The EMD is held by a third party to the contract, which is the escrow agent. This escrow agent is typically a title company but can also be a real estate brokerage or an attorney’s office. The escrow agent deposits the EMD into an escrow account until settlement.
3. Is the EMD returned after settlement?
If the house goes to settlement then the EMD is a down payment toward the sales price and closing costs of the property.
4. How much should the EMD be?
There is no specified requirement for how much an EMD should be but it is typically at least 1-2% of the sales price of the property but can be up to 10% or more. There is no limit for how high or low an EMD needs to be but many sellers will balk at an offer with a very low EMD. Conversely, sellers may be impressed by buyers who offer a high EMD and are typically more likely to accept their offer.
5. Does the EMD accrue interest while in the account?
The escrow agent deposits the EMD into an escrow account that can be non-interest bearing or interest bearing. While it is possible for this deposit to accrue interest between contract ratification and settlement, escrow agents can charge fees for establishing these interest bearing accounts. In most cases the norm is to deposit the EMD into a non-interest bearing account.
6. What happens to the EMD if the contract falls through?
If the seller does not perform their part of the contract then the EMD is released to the buyer. If the buyer does not perform their part of the contract then a portion or the entire EMD may be forfeited as liquidated damages to the seller.
7. What happens when both parties don’t agree about how the EMD shall be handled when a contract is breached?
Both buyer and seller must agree in writing how the EMD is to be disbursed in a release agreement. If one party refuses to execute the release agreement and a court finds that that party should have done so, then that party will be responsible for the other party’s legal expenses.