What You Should Know About Earnest Money and How to Protect It!

If you’re getting ready to purchase a home, your agent or lender has likely already told you to be ready to put up a good amount of money as ‘Earnest Money Deposit’.  (This is also sometimes called ‘EMD’ or ‘Escrow Money’).  But why?  Earnest Money is a critical part of the home buying process.  It is important that you understand why it is necessary as well as how to protect your funds.

What is an Earnest Money Deposit?

The Earnest Money Deposit is sort of like a security deposit.  It is a Buyer’s show of good faith that they have a serious desire and expectation to be able to complete the purchase. You, as the Buyer, offer an EMD in exchange for the Seller taking the home off the market and relying on their contract to close.  When you complete settlement, that money is returned to you by being applied toward the purchase costs.  The contract will define the amount of EMD, who will hold it (the Escrow Agent), and how quickly it will be deposited.

How much is an EMD?

At Realty Advantage we generally see Earnest Money of approximately 1% of Sales Price, but amounts vary.  Large amounts are intended to show the Seller the seriousness of the buyer’s intent.  If the buyer is willing to put more money into Escrow, it demonstrates that they are very confident they will be going to settlement on this property ASAP.

Who holds the Deposit?

The Escrow Agent is usually either the Real Estate Broker or the Title Company.  The EMD must be deposited immediately after your contract is accepted unless the contract says otherwise. The Escrow Agent is not a party to the contract.  They merely agree to maintain the deposit in a trust account and to handle it properly.  To protect your funds, you should ensure that the Escrow Agent is a reputable Broker or Title Company.  Brokers like Realty Advantage are subject to strict Maryland guidelines about how to handle trust money.  Title companies likewise have strict fiduciary duties.

What happens to the Earnest Money Deposit?

Once you find your dream home and write an offer, you will provide your Earnest Money Deposit.  Once a contract is ratified, the EMD will be deposited by the Escrow Agent into an Escrow account.  In Maryland, these Escrow accounts are non-interest bearing and are used only to hold EMD’s.  Earnest Money stays in the Escrow account until settlement, when the funds are applied toward the amount due from the Buyer.

If you cancel the contract based on a contingency in your contract, your EMD should still be protected.  For example, if the home inspection does not go well, you may timely exercise your right to cancel within that contingency. Then the Seller should quickly execute a Release of Contract.  If a transaction does not get completed, the Broker or Title Company can release the EMD after receiving a signed release or interpleader or court order.

 

The Earnest Money Deposit is the first of many important steps to understand in the home buying process.  Realty Advantage has many great Buyer Agents who will be happy to help you find your next home.  If you have any questions about the home buying process, or want to start your search, contact our office today!

 

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