What is an Earnest Money Deposit?

What is earnest money?

If you’re buying a home, chances are you’ll have to put up an earnest money deposit (EMD). Earnest money tells the seller that you are serious about your offer to buy the house and this deposit is a show of good faith. Without the requirement of earnest money, a real estate buyer could make offers on multiple homes, essentially taking them off the market until they decided which one they liked best. So for this reason, sellers rarely accept offers without the buyers putting down earnest money to show that they are serious and are making the offer in good faith.

The amount of earnest money you will want to present will depend on the market, there is really no set amount and can be negotiable, but typically it equates to around 1%-3% of the purchase price of the home. And as a buyer, you should remember that this is generally non-refundable, as it acts as a deterrent to backing out of a deal in progress. This money is generally held by the seller’s broker, and used towards the down payment and closing costs.

In a buyer’s market when home sales are slower, you may be able to get away with a smaller earnest money deposit, especially if you’re the only interested buyer. But in a seller’s market, where multiple bids are coming in, the seller will likely require a larger deposit. Offering too little could also come off as insulting, so best to consult your realtor for their suggestion.

To protect the buyer, they may want to discuss adding contingencies in the contract in regards to the earnest money deposit, so that they can legally cancel the contract without losing the EMD.  These could be things like:

  • Financing
  • selling their current home first
  • home appraisal
  • home inspection
  • clear title

A reminder that lack of contingencies can be favorable to the buyer, and the seller could counter the offer to not include them. But before removing any contingencies, it’s best to discuss it with your real estate agent.