What's An Earnest Money Deposit?
What’s An Earnest Money Deposit or Good Faith Deposit?
Your Earnest Money Deposit (EMD) or good faith deposit is your SKIN IN THE GAME. It’s kind of like your “promise” to the seller. Typically within the first three business days of having your offer accepted, you’ll need to get a small deposit over to the escrow company where they will hold it for you. This deposit buys you time to do your due diligence on the property like inspections, making sure your financing is secure, the appraisal is done etc…
Your EMD does not obligate you to buy the house, it just secures your spot to start your due diligence and it gives the seller incentive to take the house off the market and let it go pending for you. This deposit is protected by contingencies that are written into your purchase agreement. You have a specified, agreed upon, amount of time to “get stuff done” within that contingency time frame and all of your negotiating should be done within this period. Once that time frame is up, you have to release those contingencies.
If you decide to back out of the deal, that decision should be made before the release of your contingencies. If it happens after, then your earnest money deposit is up for grabs and now the seller may have a right to keep it. So make sure you really want the house and everything is buttoned up before you release those contingencies.
Ultimately, if everything goes well and you’re still on track to close, your earnest money deposit goes toward your down payment or “cash to close.” Here’s an example: Let’s assume your down payment and all of your closing costs came to a total of $34,000. If the earnest money deposit that you already have sitting in escrow was $4,000 then now your cash to close is $30,000, it’s pretty simple. Check out my next blog entitled “What is a buyers due diligence period?
Thanks for reading,