What is EMD?
EMD stands for earnest money deposit, which is given to a seller by a buyer in order to show good faith when buying a home. The money actually buys the buyer time to find financing for the purchase, as well as get a title search, property appraisal and inspection done in the meantime. This can also be called “good faith money.”
The EMD is usually delivered when the purchase agreement is signed, but it can also be included with the buyer’s offer. The funds are held in an escrow account until closing, so that the seller knows that the buyer is sincere about the sale. Eventually, the deposit is applied to the buyer’s down payment and closing costs.
The contract involving both the buyer and the seller does not obligate the buyer to purchase the property, but asks the seller to take the property off the market while it is being inspected and appraised. The EMD shows evidence of the buyer’s offer in good faith.
If the sale does not go through, the buyer may be able to reclaim the EMD. The contract may require a property fix, which may not happen or may go wrong, causing the sale agreement to fall through. However, an EMD is not refundable in every instance. The seller may be able to keep the EMD if the buyer changes their mind or fails to meet the deadline on the contract. In many cases, the buyer may have to forfeit the EMD.
An EMD is not set in stone — it can be negotiated between the buyer and the seller. Often, the amount can range between 1% and 2% of the purchase price of the home, depending on the market. It could be higher if the property’s market is hot.
A higher EMD may be a stronger signal to the seller that the buyer is serious. However, the buyer should remain careful that not too much money is offered as an EMD, since it may not be possible to get that money back if the deal falls through.
An EMD is usually paid by the buyer with a certified or personal check. It can also be paid with a wire transfer. The money goes into a trust or escrow account that is held by the real estate brokerage, law office or title company. The funds are held until the deal closes, and the money is applied toward the buyer’s closing costs and down payment. Escrow accounts can also earn interest on the EMD.
Considerations to keep in mind when buyers offer an EMD, according to Investopedia:
Make sure contingencies for financing and inspections are included in the contract. Without these, the deposit could be forfeited if the buyer can’t get financing or a serious defect is found during the inspection.
Read, understand, and abide by the terms of the contract. For example, if the contract states the home inspection must be completed by a certain date, the buyer must meet that deadline or risk losing the deposit—and the house.
Make sure the deposit is handled appropriately. The deposit should be payable to a reputable third party, such as a well-known real estate brokerage, escrow company, title company, or legal firm (never give the deposit directly to the seller). Buyers should verify the funds will be held in an escrow account and always obtain a receipt.
Bottom line: An EMD can help buyers strengthen their ownership of a deal, and show the seller that the buyer is serious about a purchase. It’s meant to be a legal, seamless, low-fuss transaction that helps the negotiation move along smoothly.