A Buyer's Guide:
The Earnest Money Deposit (EMD)

TLDR: You submit earnest money with the offer, which shows the seller you’re serious. That amount is what you risk if you don’t follow the terms of the contract.

The earnest money deposit (EMD) is a small amount of money (relative to the purchase price, anyway) given to the seller with the offer to show that the buyer is genuinely interested in purchasing the property and is not wasting the seller’s time. In legalese, it’s known as consideration and is required for the contract to be legal. If the terms and conditions of the offer are the rules of the game, then the earnest money deposit is what's at stake if you don't follow the rules.

Tip

Putting down a higher earnest money deposit shows you're more committed to purchasing the property.

The money isn’t just a gift to show the seller goodwill; The money goes to a neutral third party–typically into an escrow account managed by the title company or real estate attorney who conducts the closing–to deposit and hold until closing so the seller doesn’t run off with it, but it could go to the seller if you don't adhere to the terms of the contract. If the transaction closes, the funds end up going toward the house at closing, and it gets refunded to you if you back out of the offer under one of the contingencies included in your offer. The purpose of earnest money is to show that you’re serious–or earnest–about your offer, and are willing to lose that amount if you walk away for a reason not outlined in your offer in one of the contingencies. It will also compensate the seller for lost time that they could have been marketing the property while it was on hold for you. A word to the wise: do not put down an EMD on a house unless you’re serious about purchasing.

Fun Fact

You don't actually submit the earnest money deposit until you and the seller have agreed on the terms and signed the contract. In the past, before everything was conducted electronically, the buyer would include a physical check (or a scanned copy of the check) to the seller along with the signed offer letter.

How much should I put down?

We require that buyers offer a minimum of $1,000 to the sellers when making an offer (no one thinks a buyer is serious with a $10 EMD), but earnest money deposits can be as much as 10% of the purchase price in highly competitive markets. Typically, $1,000 is enough money to show that you're committed to buying a home.

Under what circumstances will I forfeit my EMD?

Contingencies, along with the general terms and conditions, are what comprise the rules of the contract and will protect you if you need to back out of the contract because something is wrong with the property or your financing falls through. However, your justification for ending the agreement must be stipulated in the contract in a contingency. If you walk through the house at some point before closing and decide that you'd prefer all bronze door handles to chrome, that does not qualify as a reason to walk away from a house. All reasons ("My dog ate the contract!") not outlined in contingencies don't qualify as justification and you'll likely forfeit the money to the seller.

With the right contingencies in place, valid reasons for terminating the contract and getting your earnest money deposit back include:

Not qualifying for a loan that would fund the house
The property not appraising at the agreed upon contract price, and the seller being unwilling to lower the price
Not agreeing with the seller on inspection repair items to be completed or credited
Issues with the sale of another property, which is required to close on this property
Deciding against living in a property that is part of an HOA or Condo Association