The Earnest Money Deposit or EMD is a Buyer’s deposit on a home indicating that they are “earnest” in their intent to buy a property. The deposit is the Buyer’s guarantee that they will close on the home, and if they default, they are willing to forfeit the deposit as damages.
The terms of the EMD must be clearly stipulated in your offer to purchase. The terms below are those in my own Purchase Agreement. Keep in mind that the laws in your state and/or the terms stated in your Purchase Agreement may be different. The Buyer should consult an attorney for specific advice to their situation.
How much is the Earnest Money Deposit?
It is not a fixed or pre-determined amount; it’s a point of negotiation. In the glory days, I wouldn’t have even considered accepting an offer with an EMD less than 3% of sales price. While times have changed, I still want at least 1% and the higher the price, the more EMD I expect, up to 3%. There’s a saying in the industry “weak deposit, weak deal”. I believe it.
Who will hold my deposit?
The Buyer’s broker will hold the EMD in their escrow account, in accordance with the State of Michigan statutes. (It’s not allowed to be held in the general account for a company’s use. This is called a “commingling” of funds and is illegal.)
If the property being purchased is new construction or a bank foreclosure, for example, the builder or bank may require they hold the deposit in their own escrow account. I do not have a problem with this, but it is a negotiable item. If the Buyer is uncomfortable, they may request a third party hold the deposit instead.
What happens to the Earnest Money Deposit upon mortgage approval?
The EMD is applied toward the Buyer’s closing costs and escrows at closing.
What happens if the home inspection fails?
If the house does not pass inspection, our Purchase Agreement requires the EMD be refunded to the buyer. Be aware of the terms of the inspection contingency, particularly the time constraints.
Unless the Buyer was dishonest in some way about their qualifications i.e. overstating income, understating debts or not complying with the bank’s requests for necessary information to process the loan, etc., our Purchase Agreement requires the EMD be refunded to the Buyer. If the Buyer was dishonest, the EMD is at risk.
What happens to the deposit if the Buyer changes his mind?
The EMD is also forfeited should the Buyer change his mind and simply decide not to proceed with the sale. This is a breach of the terms of the contract and the Buyer is in default. (Be aware, forfeiture of the deposit may not be the Buyer’s only penalty. There could also be additional legal remedies available to the seller, such as suit for specific performance.)
The amount of the deposit is an important but often overlooked part of your offer. When I see a weak deposit, I see a weak buyer, one who is not sure of their decision to stay in the deal. The skinny on a fat deposit is if the Buyer is serious and keeps their end of the bargain, the deposit is safe.