Learn About Earnest Money Deposits.
An earnest money deposit (EMD) is a deposit made by a buyer to show their commitment and seriousness in purchasing a property. It is also known as a good faith deposit because it shows that the buyer is acting in good faith and is serious about buying the property.
The earnest money deposit is typically made soon after the purchase agreement is signed by both the buyer and the seller. The amount of the deposit is usually a percentage of the purchase price, often around 1-2%, but can vary depending on the market and the terms of the sale.
The earnest money deposit is typically held in an escrow account by a third-party such as a title company or a real estate brokerage. The funds are held until the transaction is completed or until one of the parties breaches the contract. If the sale is completed, the earnest money deposit is applied towards the purchase price of the property. If the sale falls through, the earnest money deposit may be returned to the buyer, depending on the circumstances and the terms of the contract.
The purpose of the earnest money deposit is to protect the seller from a buyer who may make an offer and then back out of the deal without a valid reason. The deposit provides some assurance to the seller that the buyer is committed to the transaction and will follow through with the purchase. The earnest money deposit also helps to cover the costs of the seller if the buyer breaches the contract, such as expenses related to finding a new buyer.
In summary, an earnest money deposit is a deposit made by a buyer to show their commitment and seriousness in purchasing a property. It is typically held in an escrow account and is applied towards the purchase price if the sale is completed, or returned to the buyer if the sale falls through.