What Is an Earnest Money Deposit and How Does It Work?

Do I have to make an earnest money deposit?

This is how the earnest money deposit works

Earnest money depositYou've saved up for years, researched, and finally found the perfect home. Congratulations! The next step is to put down an earnest money deposit (EMD). The following information will inform you about this significant step in the home-buying process.

What is Earnest Money?

When you buy a home, the purchase offer will require you to put down an "earnest money deposit." This good faith deposit shows the Seller that you are serious about buying their home. The amount of earnest money varies but is typically 1-3% of the purchase price in most real estate markets. If you believe in a $200,000 home, your earnest money deposit would be $2,000-$6,000.

Until closing, the earnest money deposit is kept in escrow. At that time, it is applied toward your down payment. Suppose, for some reason, the deal falls through (e.g., you can't get financing).

In that case, your earnest money deposit will usually be refunded to you.
One of the numerous procedures for purchasing a property is making an earnest money deposit. But it's an important one! Earnest money deposits show the Seller that you're committed to buying their home, and they will take your offer more seriously.

What is Earnest Money Used for?

The earnest money deposit is insurance for the Seller in a real estate transaction. It shows that you are serious about buying the property and protects the Seller in case you decide not to continue for any reason that isn't explicitly covered by the contract.

For example, if you get cold feet or decide you don't like the home after the inspection, you could lose your earnest money deposit. However, if something happens that was out of your control, like the Seller cannot provide a clear title to the property, you would get your deposit back.
Until closing, the money is often kept in escrow by the title firm or real estate business. It will then be applied to your first deposit. If the transaction proceeds as planned and you do not back out, you will never see that money again.

If you withdraw from the agreement for an unknown reason, you may lose your earnest money deposit.

Is Earnest Money Refundable?

What happens if you change your mind or can't get financing? Is earnest money refundable?

In most cases, the earnest money is refundable if the deal falls through. However, there are some situations where the Seller may keep your earnest money deposit. For example, the Seller could keep your earnest money deposit if you fail to meet the contingencies in your contract or back out of the deal for no reason.

It's essential to read your contract thoroughly to understand your specific situation. If you have any questions, ask your real estate agent or lawyer.

How Much is Earnest Money?

Typically, earnest money deposits range from 1% to 3% of the home's purchase price. If you're buying a $300,000 home, your earnest money deposit could be as low as $3,000 or as high as $9,000.
The earnest money you'll pay when buying a home varies greatly depending on the home purchase price and your circumstances. Generally, the higher the purchase price, the higher the earnest money deposit.

While the size of your earnest money deposit will be based mainly on the home's purchase price, other factors can influence how much you'll pay. For example, sellers may require a higher deposit in a competitive housing market to ensure that your offer is serious.
If you have a firm offer on a home, you can get away with a lower deposit. Nevertheless, if your request could be more assertive or there are multiple offers on the table, you will need to increase your earnest money deposit.

If you need help determining how much earnest money to offer on a home, speak with your real estate agent or loan officer. They can help you choose an appropriate amount based on your unique situation.

Does Earnest Money Go Towards Down Payment?

Most of the time, sure. The earnest money might go toward the down payment or the closing fees.

The percentage of the purchase price the buyer pays up front and a mortgage loan covers the remainder is known as the down payment. The earnest money, however, may only sometimes count toward the down payment.

When Can the Seller Keep My Earnest Money?

Most sales contracts for real estate purchases include provisions that safeguard the buyer with certain contingencies. If you cancel the contract due to a mutually agreed-upon contingency, your earnest money will be refunded to you.
If any of the conditions listed below are met, you will get your earnest money back:

  1. The house fails the home inspection.
  2. The property's appraised value is less than its sale price.
  3. There are problems with the title search of the residence.
  4. You are unable to secure a mortgage.

Your earnest money could be lost if any of the following apply:

1) You need to satisfy the timeframes specified in the contract for the various inspections and appraisals.
2) You decided to withdraw from the sale without a valid reason.

When is Earnest Money Due?

If you're in the process of buying a home, you may be wondering when your earnest money is due.
The earnest money is paid by personal check, certified or cashier's check, or wire transfer if the offer is accepted. The deposit is often kept in escrow with either the Seller or buyer's real estate company, title firm, or escrow business.

Your earnest money is usually due at the time of your offer unless you have negotiated another time period with the Seller. This money is typically held in an escrow account by the title company or real estate agent until closing.

Suppose the transaction falls through for various reasons. In that case, the earnest money is usually refunded to the buyer (including the fact that the buyer was unable to secure financing).
You may lose the property if you do not pay the requisite earnest money on time or if the check fails.


Is Earnest Money Required?

The answer is maybe. Sometimes, sellers may request a good faith deposit as part of the sales agreement. In other cases, buyers may make a deposit to show their good faith and commitment to the deal. Ultimately, whether or not an earnest money deposit is required will come down to the individual Seller and buyer.

Where Does Earnest Money Go?

Where does the earnest money go?An earnest money deposit, also known as an EMD, is simply kept by a neutral third-party escrow business in accordance with the guidelines outlined in the legally binding purchase agreement.

There may be a 'contingency time' for the appraisal, bank approval, property inspection, or HOA deed approval.

The earnest money held by the escrow or title company is typically applied to the house buyer's down payment or closing fees. This occurs in the majority of transactions.

The earnest money deposit can be cashed when the escrow is established. Because of this, you need to ensure that your funds come from the appropriate sources.
The Steps Involved:
1) The earnest money is delivered to an escrow (or title) company along with the accepted purchase contract.
2) At settlement, the earnest money deposit is applied as a credit toward the buyer's down payment and/or the Seller's closing costs.
3) The earnest money will be refunded to the buyer if there are no closing costs or down payment required. This often happens when purchasers pay cash.

If the buyer withdraws, what happens to the earnest money?

Typically, if the buyer cancels the purchase, the earnest money deposit is lost. Due to the fact that the earnest money deposit confirms the buyer's intent to acquire the property, this is the case. However, there may be instances in which the buyer is entitled to a refund of the earnest money.

For example, if the Seller cancels the sale or if concerns with the property were not revealed in advance.
The deposit is refundable only under specified conditions.

Rotating queestion markFAQs About a VA Loan Earnest Money Deposit


What causes you to lose earnest money?

1) The buyer must satisfy the contract's deadline. If the buyer can't make the deadline, for example, they may lose the earnest money if they break the contract and don't purchase the property.
2) The buyer backs out. After signing a purchase agreement, a prospective buyer sometimes chooses not to buy the home. When this occurs, the buyer needs to point to a contingency in the purchase contract for not going through with the purchase; otherwise, the buyer will forfeit the earnest money deposit

Will I lose my deposit if I am denied a mortgage?

If there is a mortgage contingency clause, you will keep your deposit if your application is declined. However, if your application is granted and you decide not to proceed with the mortgage, your deposit will be forfeited.

Can earnest money be a personal check?

The answer is maybe. While most sellers would want a certified or cashier's check for the earnest money deposit, others may be prepared to take a personal check. Before writing the check, there are several things to consider.
First, you must verify that the check is dated for the day of or before the deposit is due. This will guarantee that the check clears in a timely manner. Second, your bank account must have sufficient funds to pay the cheque. Remember that the earnest money deposit is normally 1-2% of the buying price, so you'll need cash on hand.
Always inquire whether the vendor accepts personal checks. And if they accept a personal check, follow the following steps to guarantee the check clears and the deposit is completed.

Conclusion

The importance of a VA earnest money deposit for home purchases has been clarified in this article. The earnest money deposit was one of the parts of the house buying process that confused me the most when I initially started shopping. But if you get what it is and how it functions, it becomes easy. So keep the significance of an earnest money deposit in mind if you're looking for a new property.

Recommended Reading

  1. VA Residual Income: What You Need to Know
  2. Save Thousands on Your VA Loan: Closing Costs Paid by Seller
  3. How To Qualify For A VA Loan As A Surviving Spouse