Featured In Apartment Therapy’s article “How Earnest Money Can Help You Buy the Home of Your Dreams” by Gina Vaynshteyn. The article discusses the meaning of Earnest Money Deposit when buying a home.
It’s kind of like putting a ring on it. Karen Kostiw of Warburg Realty tells Apartment Therapy, “An earnest money deposit is similar to someone in a deeply loving relationship offering an engagement ring as declaration of their love, dedication, commitment, and intention to marry.”
Earnest Money Deposit, also known as a “good faith deposit” is a type of security deposit in a real estate transaction that a seller requires as a sign of “good faith” from a prospective purchaser. An Earnest Money Deposit is similar to someone in a deep loving relationship offering an engagement ring as a declaration of their love, dedication, commitment and intention to marry. An Earnest Money Deposit is provided by the prospective purchaser when major negotiations are complete and both parties are confident that a sale will be accomplished. Of course, sometimes items arrive that will result in the sale not moving forward and those provisions defining the means and time-frame of refunding the security deposit are clearing set forth in the contract. Some of the contingencies that must be met to move the sale forward include: 1. Financing: Providing the buyer the time-frame to ascertain a loan; 2. Appraisal: Ensuring the sales prices meets fair market value; 3. Inspection: The ability to hire experts to evaluate the condition of the home, and: 4. Title Search: Reviews the record of ownership to ensure there is no claim of ownership. If these items are not satisfactory, the Purchaser should have the right to receive a refund of the Earnest Money Deposit. The standard convention of the deposit amount is 10% of the purchase price, however, depending on the market and agreed upon term it could range between 1% to 50% of the sales price. Typically, Earnest Money Deposit is held in an escrow account by the seller’s attorney in a segregated and insured account and at closing is applied to the buyer’s down payment and closing costs. There are some markets that an independent third party or the title company will hold the deposit. If ultimately a prospective buyer or seller decides not to move forward with a transaction as a result of a legitimate reason or failure of one or more of the contingencies being met as described above, the Earnest Money Deposit must be legally returned, but if a buyer does not want to close for reasons not allowed and stated in the contract, the seller is entitled to retain the buyers Earnest Money Deposit. As such, it is vital that both parties are confident in their decisions prior to providing or accepting the Earnest Money Deposit.