Earnest money deposit

Earnest money deposit

An earnest money deposit (EMD), sometimes referred to simply as earnest money or a good faith deposit, is a sum of money that a buyer offers to a seller as a sign of their serious intent to purchase a property. It's typically a percentage of the total purchase price and is often held in escrow until the closing of the transaction.

The purpose of earnest money is to demonstrate to the seller that the buyer is committed to the purchase and is willing to risk a certain amount of money to secure the deal. If the buyer backs out of the agreement without a valid reason, they may forfeit the earnest money to the seller as compensation for the time and effort invested in the transaction.

However, if the sale goes through as planned, the earnest money is usually applied towards the down payment or closing costs. In cases where the sale falls through due to reasons outlined in the contract (such as failure to secure financing or issues found during inspections), the earnest money may be returned to the buyer.

The specific terms regarding earnest money deposits are typically outlined in the purchase agreement or contract between the buyer and seller. These terms may include the amount of the deposit, conditions for its forfeiture or return, and the timeline for its release. It's essential for both parties to understand and agree to these terms before entering into a real estate transaction.