An earnest money deposit (EMD) is an important part of the homebuying process that, when used correctly, will help you achieve your real estate goals.

Understanding what EMD is in real estate is essential if you want to make an offer on a home and show the seller that you are serious about doing so.

What is EMD in Real Estate?

If you’ve ever watched a real estate show or a movie about business, you’ve most likely heard the term “escrow.” Escrow is a popular term that is frequently misinterpreted. Here are two terms that can help you understand Escrow, EMD, and their relationship.

• Escrow: is a third-party custody of a bond, deed, or other document that only becomes effective after a specific condition is met.

• Earnest Money Deposit (EMD): is a deposit provided to a seller to show a buyer’s good faith in purchasing a residence. The money allows the buyer more time to obtain financing and complete the title search, property assessment, and inspections before closing. Earnest money can be thought of as a home deposit, an escrow deposit, or good faith money.

Escrow Versus EMD Relationship

Escrow and EMD are sometimes confused, but rest assured that they function closely together. To summarise the definitions, escrow is a custodial account that safely houses earnest money, which represents a buyer’s good faith in purchasing a home.

Check out our mortgage terminology guide for additional phrases you may encounter. Please keep in mind that earnest money will be credited to the buyer’s side to cover closing expenses or applied to your down payment at settlement.

How large an EMD is Required

In the DMV, the estimated EMD is 3% to 5% of the home’s purchase price. The amount of earnest money required will be determined by the circumstances surrounding your offer.

However, Investopedia states that “in hot housing markets, the earnest money deposit might range between 5% and 10% of a property’s sale price.” Two of the most popular examples:

• Example 1: First-time buyers who use buyer help programs likely to pay less for EMD.

• Example 2: To strengthen your offer in a competitive environment, consider putting down a bigger EMD to demonstrate your seriousness to the seller.

It’s crucial to remember that earnest money deposits are a necessary tool for demonstrating good faith to the seller and, eventually, helping you meet your home-buying goal sooner.

EMD Timelines

Typically, the EMD will be payable within 3-5 days of the seller accepting your offer terms. That is, the deal has been ratified.

Within the DMV real estate market, the settlement business is the party that keeps the EMD, which will most likely reside in a secure escrow account until one of the outcomes (described below) occurs.

Putting money in escrow provides additional security to your deposit and ensures that it is handled correctly as things begin to take shape. Settlement businesses often accept personal checks and wire transfers for EMD deposits.

EMD outcomes

When you put money down or deposit it into an account over which you have no control, you may be concerned about what will happen next. When addressing EMD in real estate, the following results are possible:

• You successfully complete all of the procedures for purchasing the house, and your EMD is deposited towards your down payment or closing fees. If there is an excess quantity of funds, you will receive a cheque back!

• The contract is cancelled during the contingency period (inspection, appraisal, financing, and, if required, condominium document review). In this case, you’ll get your EMD in the form of a cheque. For additional information on this subject, please see our primary home offer contingency guide.

• You break the terms of the contract and forfeit your EMD to the seller. This will not occur if you obey the terms and conditions of the contract. This is the worst-case scenario, which emphasises the need to form a real estate team to guide you through the entire process.

Final Thoughts

An earnest money deposit is another tool in the buyer’s arsenal that enables them to demonstrate good faith in satisfying the seller’s demands.

It is critical to surround yourself with a real estate team who can help you through this process. These team members include, but are not limited to:

Possible roles include realtor, settlement company, and attorney.

With the Realtor as the cornerstone of your team, they will assist you in assembling the rest of the team required for a successful house purchase and mitigating any blunders along the way.