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Earnest Money Deposit (EMD)
An earnest money deposit (EMD) is a crucial piece of the homebuying process that will help you reach your real estate goals when used effectively.
If you’re looking to make an offer on a home and want to help assure the seller that you’re serious about putting in an offer, understanding what EMD is in real estate is necessary.
This discussion will go through:
- What is EMD in Real Estate?
- How much of a deposit you’ll need
- Timelines of EMD
- Outcomes
What is EMD in Real Estate?
If you’ve ever watched a real estate show or movie that has some sort of business topic, you’ve probably heard the word Escrow used before. Escrow is a common term that is often misunderstood.
Here are two terms you’ll need to know for this discussion that will help make better sense of Escrow, EMD, and the relationship between the two.
Escrow:
Defined as a bond, deed, or other document kept in the custody of a third party and taking effect only when a specified condition has been fulfilled.
Earnest Money Deposit (EMD):
Earnest money is a deposit made to a seller that represents a buyer’s good faith to buy a home. The money gives the buyer extra time to get financing and conduct the title search, property appraisal, and inspections before closing. In many ways, earnest money can be considered a deposit on a home, an escrow deposit, or good faith money.
Escrow vs. EMD Relationship
Escrow and EMD can often be confused, but rest assured that they work directly together.
To sum up the definitions, Escrow is a custodial account that securely holds earnest money representing a buyer’s good faith to purchase the home.
Be sure to check out our mortgage terms guide for more terms that you’ll come across.
Note: At the time of Settlement, Earnest money will be credited towards the buyer’s side to cover closing costs or it will be added to your down payment.
How Large of an EMD is required?
Within the DMV, the expected EMD is 3% to 5% of the home’s purchase price. Based on the circumstances of your offer will determine the earnest money amount. However, according to Investopedia, “In hot housing markets, the earnest money deposit might range between 5% and 10% of a property’s sale price.”
Two of the most common examples:
| Example 1 | First time buyers using buyer assistance programs tend to put down less for EMD. |
| Example 2 | In a competitive offer situation, to make your offer appear stronger you can put down a larger EMD to show the seller how serious you are. |
It’s important to remember that Earnest money deposits are a necessary tool to show good faith to the seller, and ultimately help you reach your home buying goal faster.
EMD Timelines
Typically, the EMD will be due within 3-5 days of the seller agreeing to your offer terms. Ie the contract is Ratified.
Within the DMV real estate market, the settlement company is the party that holds the EMD and it will likely sit in a secure escrow account until one of the outcomes (discussed next) plays out.
Putting money in escrow adds a level of security to your money deposit and ensures that it’s properly handled as everything starts to shape out.
Note: Settlement companies typically accept personal checks and wire transfers for your EMD deposits.
EMD Outcomes
Whenever putting money down or depositing into an account that you don’t control, there can be some concern as to what happens next. When discussing EMD in real estate, there are a few outcomes that are possible:
- You successfully complete all your requirements to purchase the home and your EMD is credited towards your down payment or closing costs. If there is an excess amount of funds left over, you will receive a check back!
- Contract is cancelled during the contingency portion (Inspection, Appraisal, Financing, and if applicable the Condo Document Review). In this scenario, you will receive your EMD in the form of a check. Review our primary home offer contingency guide to learn more about this section.
- You violate the terms of the contract and you forfeit your EMD to the seller. This will not happen as long as you follow the terms and conditions of the contract. This is the worst case scenario and highlights the importance of building a real estate team that will guide you through the entire process.
Concluding
An earnest money deposit is another tool in the arsenal of the buyer that allows them to show good faith in meeting the sellers terms. It’s crucial to build a real estate team around you that will make this process easier. Those team members include but aren’t limited to:
- Realtor
- Settlement company
- Attorney
With the Realtor being the foundation of your team, they’ll help you build out the rest of the team needed for a successful home purchase and mitigation of any missteps along the way.
Let us know if you’d like help building your real estate team or need some help along the home buying journey.
