This guide explains the strategy of it and what happens to the deposit if you back out.
The Earnest Money Deposit or “EMD” is a buyer’s deposit on a potential home purchase. It represents the buyers are “earnest” in their intent to buy the property.
The deposit is the buyer’s guarantee that they will close on the home or risk losing should they default on their contract to purchase.
The deposit is usually in the form of a personal check made payable to the brokerage of the buyer’s agent. In Michigan, the buyer’s agent typically collects the check at the time of the offer, and it is deposited into the Broker’s escrow account within 48 hours.
The terms of the amount and release of the earnest money deposit must be clearly stated in your Offer to Purchase. The statements below reflect the terms in my own Purchase Agreement and may differ from yours.
The laws in your state and the terms stated in your Purchase Agreement may differ. You should consult an attorney for advice specific to your situation.
How much is the deposit:
“The more the deposit, the more attractive the offer” is true. However, the amount of the buyer’s deposit is a point of negotiation, not a fixed amount required by law, it’s a matter agreed upon by both buyer and seller and much of it subject to local customs. I’ve seen as little as $1,000 and as much as 10% of the sale price.
Who will hold my deposit?
The buyer’s broker most often holds the EMD in a special escrow account, governed by the statutes of the State of Michigan.
If the property is new construction or a bank foreclosure, for example, the builder or bank may require they hold the deposit in their escrow account.
While this is customary, and I see no reason to object, you may ask in your negotiations that a third party hold the deposit, such as a title company.
What happens to the deposit?
The EMD is applied toward the buyer’s closing costs and escrow fees at closing. There will be a credit on the buyer’s closing statement equal to the amount of the deposit.
What happens to the deposit if the home inspection fails?
The offer should always be contingent upon the buyer’s satisfaction of inspections to be completed by a certain deadline, typically 7-10 days after acceptance of offer.
The terms of the inspection contingency in our purchase agreement state if the home does not pass inspections to the buyer’s satisfaction within the stated timeframe, the EMD is refunded to the buyer in full. The terms and deadlines in your offer may be different.
What happens to the deposit if the mortgage is denied?
If the mortgage is denied, in most cases, the EMD is refunded to the buyer. The exception in our purchase agreement is if the buyer is in some way responsible for the denial.
For example, not being truthful in their application, not disclosing they have a house they need to sell, or failing to provide information necessary to process the loan. In these cases and potentially others, the buyer’s deposit is at risk and you probably need an attorney.
What happens to the deposit if the Buyer backs out?
If the buyer backs out of the legal contract, the EMD is forfeited by the buyer. Be aware, forfeiture of the deposit may not be the only penalty to the buyer. There could be legal remedies available to the seller as well, such as a lawsuit for specific performance, financial loss and other remedies as determined by an attorney.
If you are a serious buyer, make a serious deposit. It’s only at risk if you change your mind.
If you keep your end of the bargain and comply with all of the terms of your Purchase Agreement, the deposit is applied against your closing costs at the closing and could tip the scales in your favor in a multiple offer situation.
**I am not an attorney. Consult the advice of an attorney directly for your situation and to interpret the terms of your purchase agreement. These statements do not apply to every situation and are not to be relied upon as legal advice.**
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