Okay your offer is accepted and your agent is asking you for the EMD. Excuse us for the real estate lingo confusion, sometimes we get carried away! EMD stands for Earnest Money Deposit and here is what you need to know:
The earnest money deposit not only shows you have a vested interest in the home you're proposing to purchase, and while it's not "required" it is state regulated- so there is a strict contractual timeline to follow when it comes to submitting the check to your agent.
What happens with the EMD?
The EMD check is commonly made payable to your buyer’s agent’s brokerage or to your title company, if your buyer's agent's brokerage doesn't have an escrow account set up. The EMD is a check that is deposited into an escrow account and your agent, or title company, whoever is holding it in escrow, applies it to closing costs. It is required that the EMD check be deposited into the prospective escrow account within 2 banking days of the seller's acceptance of a purchase agreement. NO EXCEPTIONS! It is always wise to have your agent hold a written check, to ensure the EMD is submitted within the required window of time. If you end up never buying a home, or changing agents, your agent will return the check to you for you to dispose of it.
How much should you reserve?
It is customary for the purchaser to submit an earnest money deposit of 1-3% of the purchase price, or at minimum $1,000. In some situations, a seller might consider an EMD of $500, but it is not common and usually dependent on the type of loan and concessions negotiated.
Do I get my EMD back?
As stated above, your EMD is applied to closing costs, if your transaction closes. But, in the event the sale is cancelled, whether or not your EMD is returned to you is wholly dependent on what your purchase contract states.
ALWAYS consult with your agent on matters specific to your EMD.
Here are typical examples of an EMD being returned to a purchaser:
1. During the home inspection you find issues that bring you to the decision that this isn't the home for you. There is a short window of time for the inspection period. As long as you ask for a mutual release during that window of time, your EMD is protected in most cases.
2. In most cases a lender requires the home to appraise at purchase price or higher in order for them to fund the loan. However, this is not always the case- especially if you're putting 20% or more down on a home. If you cannot obtain financing due to the property not appraising at or above the agreed upon purchase price, your EMD is protected and will be returned to you.
3. If your financing doesn't require the home to appraise at value, you should have a clause in your contract stating that you have the right to a mutual release of contact and the EMD will be returned to you. Make sure this clause is in your contract!
4. If your offer was accepted based on the sale and close of your home, and the transaction on your home falls apart, you didn't fulfill that contingency and your EMD should be returned to you. Unless the seller of the home you offered on asks for a non-refundable EMD.
5. The seller cancels the contract. At this point, you should consult an attorney before accepting your EMD back. If you sign a mutual release and accept the EMD back, you won't have grounds to sue for performance.
Here are typical examples of an EMD not being returned to a purchaser:
1. If you don't follow your contract timelines, you risk voiding the contract and losing your EMD. If you run the risk of surpassing deadlines, request an extension before it's too late!
- If you don't apply for your mortgage within the days specified and the financing isn't secured in the time frame specified in the contract
- If you notify the seller you're cancelling the contract because of inspection issues, after the inspection contingency time frame has been surpasses, your EMD is at risk.
2. If you waive contingencies in your contract and you have a change in heart about your purchase, you run the risk of losing your EMD.
3. And the reason the EMD became common was to protect sellers from buyers who just "walk away" from their transaction. If you change your mind about wanting the home and there is no reason relevant to the contract or contingencies, your EMD is forfeited to the seller.
Navigating the various earnest money deposit caveats is not something you have to do alone. Your real estate agent can help answer any questions & negotiate contingencies that are favorable to you. Utilize their knowledge, you hire them to help you, but taking the time to read articles such as this and expanding your knowledge will go a long way in protecting yourself financially!.