What is Earnest Money Deposit? How does it work? Mistakes to avoid

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Earnest money deposit is a term that refers to an initial investment or installment to a transaction as a show of intent. Consider it a security fund from the buyer to the seller to show his seriousness regarding the deal. Earnest here means sincerity and pertains to the attitude of the buyer as having goodwill. Additionally, if you need a 3D floor plan or 3D exterior renderings, then we can assist you in a smooth way.

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What significance does an earnest money deposit have? How is it different from the final payment of a deal? How much amount counts as an earnest money deposit? Where does this deposit go, and what happens to it afterward? These are questions you need answers to before committing to an earnest deposit. Otherwise, your dealing as a buyer or a seller is susceptible to be a fraud.

How Does an Earnest Money Deposit Work?

Most earnest money deposits occur in real estate dealings. These deals involve large sums of money, and the seller needs insurance that the buyer is serious about buying the property. An earnest deposit is that assurance the seller is looking for from the buyer to progress with the deal.

The earnest deposit plays a part in the final payment for a property, but it is a separate matter from the closing terms. A safe deposit involves a contractual agreement between the buyer and the seller regarding the purchase of the property. Once both parties sign this agreement, the earnest deposit from the buyer resides in an escrow account. It is a bank account specifically for online transactions that include an earnest money deposit.

Why Must You Make an Earnest Money Deposit?

You may ask yourself, what is the need for an earnest money deposit? When you contact a seller, it automatically means you want to make a deal with him, right? Why else would you go through the trouble of contacting a stranger? You may be correct in your assumption, but an official contract is essential to a deal on the real estate scale.

Sellers are prone to get scammed if they have nothing to fall back on in a deal. The deposit does not harm the buyer, but it means a great deal to the seller. In the end, this deposit contributes to the down payment for the property. Hence, it does you no harm as a buyer.

How Much Must You Pay For an Earnest Money Deposit?

There is no fixed amount for an earnest money deposit as it is negotiable between the parties involved in the deal. A reasonable total for an earnest deposit is somewhere between 3.25% and 5% of the final down payment. It is advisable to never go below this percentage to strike a deal for the property.

As a buyer, you have nothing to fear with the amount you pay as an earnest deposit. Your money remains safe in the escrow account as a result of the contract for the deposit. It only serves to help the seller realize your seriousness, and he cannot run away with your money. Once the entire transaction processes, your deposit either comes back to you or plays a part in the final payment, which we cover in the next section.

What Happens to Your Earnest Money Deposit?

You know that your earnest deposit goes to an escrow account, but how does the seller get it? Or, if it does not belong to the seller, does it come back to you? The final destination of the earnest money deposit depends on the agreement between the buyer and seller.

The earnest deposit goes to the seller if you agreed to make it part of the final down payment. If it is not part of the closing deal, the earnest deposit amount goes back to the buyer once the final transaction processes. The escrow bank account acts as a medium to safely transfer the money to the seller, or send it back to the buyer.


An earnest money deposit is an essential part of real estate dealings in the current age. It helps keep the transaction process safe and fair for all parties involved. Whether you are the buyer or seller in a deal, make sure you incorporate an earnest deposit in the property sale.

Mistakes to avoid while doing “EARNEST MONEY DEPOSIT”

When a buyer finds a house that matches up to his expectations a method they show their interest is through Earnest Money Deposit. Because an Earnest money deposit is the first step involved in buying a home, people make certain mistakes which are sometimes irrevocable. We compiled a list that would educate buyers on mistakes that you should avoid.

IMPROPER UNDERSTANDING OF HOW EARNEST MONEY DEPOSIT WORKS: When a buyer shows signs of commitment to making sure the sale is successful, they use Earnest money as a credit for the closing costs and the down payment. Sometimes it is an amount negotiable between the buyer and the seller. Sometimes, they provide Earnest money after signing the purchase agreement or sales contract, but they could append it to the offer.

CONTRACT TIMELINE: The seller of a home may decide a timeline for the happening of certain things which could include either when the inspection of the home will occur or the mortgage loan terms. You are to reach the seller’s requirement timeline within a settled time frame. If you do not meet a certain timeline, the seller can give you extra time or cancel the deal altogether so you have breached the contract and getting your deposit refunded is 50-50.

WRONG AMOUNT OFFER: Among the importance of the EMD is to display your seriousness of wanting a home to the seller. In a competitive market has lots of valuable offers, setting a high EMD can be the factor that separates you from other buyers. Support a larger EMD if you think it will ensure the sale.

BUYING BASED ON INSTINCT: Although it is of great importance it would be of a great disaster if you offer an EMD without first being certain if the home is what you want or not.

DEPOSITING YOUR EARNEST MONEY DEPOSIT: If the standard REPC omits using a title company in the reprinted language. The REPC may assume the buyer will deliver the money to their agent who will then deposit the money into their brokerage trust account. The buyer and his/her agent may have the EMD money held to a title company. No problem. Just include language on an appendix that says what title company will hold the funds.

MISHANDLING YOUR EARNEST MONEY DEPOSIT: When you make an offer or submit an earnest money deposit, have all the information. Many make the mistakes of not knowing who to give their deposits and some of these mistakes include directly offering your earnest money deposit to your seller.

CONTINGENCY REMOVAL: If eventually the deal of a real estate didn’t go through, the seller and buyer are both required to sign a document that legally renders the initial sale useless. Deleting the loan constituency clause that you wisely incorporated in your original offer. It’s a major error made by buyers especially if they love a property in areas where homes sell at a fast rate removing contingency affects the buyer and could eventually cause a loss of their earnest money. Contingencies which could be home inspection and home appraisal help protect you as a buyer especially if you back out of a deal because of something such as home inspection or appraisal and you have the contingency written in the offer and they will return your earnest money. Not including constituencies for financing and inspections in the contract without including the deposits you could give up, if the buyer can’t get financing or if they find a serious defect during the inspection.

KNOWING WHY AND WHEN TO WALK AWAY: Walking away from your earnest money deposit is difficult but sometimes it is the most reasonable decision to make most especially if a home is not in your best interest. It is better to lose money than to purchase a house you don’t have an interest in or you cannot afford.

GOOD RISK AND BAD RISK: There are certain risks that affect buyers. For example, if you are making an earnest money deposit on a house being sold “as is” we need a proper understanding. What it means is you will not have a contingency of a home inspection to fall back on. You agree to purchase the house in its exact present condition regardless of its problems. Which means your deposits are not refundable.

Not reading, understanding and abiding by the terms of the contract buyer and it could lead to losing the deposit and house. When you don’t handle deposits by a payable to a reliable party such as a popular and trusted or established real estate brokerage, a legal agency, an escrow or title firm.

Accepting the seller with the lowest offer without regard to other contractual terms.

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