Congratulations, you're about to purchase your first home! We’re guessing you’ve already gone through the mortgage pre-approval phase, and now it’s time to do the exciting part: house hunting! While you can shop with confidence because of the pre-approval letter provided by your lender, you should also be aware of the importance of having enough cash for an earnest money deposit.
Where does the Earnest Money Deposit (EMD) come in?
When you decide to make an offer on a home, both you and the seller enter into an agreement that makes the sale contingent upon certain factors such as appraisal and inspection. The terms are stipulated in a contract, and the seller takes his or her property off the market while you perform due diligence on the home. But before all of this can take place, you need to show the seller that you are truly capable and serious about purchasing the home. How? By making your money talk.
This money, which is called an earnest money deposit, is a sizeable amount that buyers include in the offer as a proof of their sincerity or earnestness—if you will.
What are the basics of an Earnest Money Deposit (EMD)?
The EMD...
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is not required—but very seldom do sellers entertain buyers who do not make a deposit in “good faith.”
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may offer some peace of mind for the seller, but it is beneficial to you (the buyer) as well.
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is usually held by the seller's broker using an escrow account.
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typically amounts to 1 to 2 percent of the asking price.
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varies from city to city and is given immediately after the seller accepts your offer.
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may be a fixed amount required by the seller rather than a percentage of the sale price.
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Cannot be a gift from a friend or family member, unless they are buying with an FHA loan.
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can be refunded in the event that any of the contingencies are not met.
Things to keep in mind:
Practice caution.
Make sure to offer enough, especially in a hot market.
Be 100% certain about the home you're trying to buy.
Have the necessary contingencies in place.
Keep track of important timelines.
If you're buying a foreclosure, be sure to analyze the risks involved.
Hold up your end of the bargain.
