Written by: Andrew Goodman
A deposit on a home, otherwise known as an Earnest Money Deposit or EMD, is a good-faith gesture to the seller that the buyer is serious about purchasing the home. If there is no deposit given, nothing is holding the buyer back from walking away from the transaction, which obviously puts the seller in a very compromising situation.
When a contract is ratified, which by definition means all parties have signed and agreed to the terms of contract, the deposit is then held in an escrow account (most likely in the settlement company’s or buyer broker’s escrow account). This account can either be an interest or non-interest bearing account and the buyer can choose which account they would prefer the deposit to be in.
Within the contract, there are several contingencies to protect the buyer’s deposit from being unduly relinquished to the seller (ie; home inspection, financing contingency, appraisal contingency, etc). If the buyer decides to walk away from the transaction after all of the contingencies within the contract are satisfied, the buyer will most likely be in default which could allow the escrow agent (the entity holding the deposit) to disperse the deposit funds to the seller (there are several rules/laws that the escrow agent must follow in regards to how/when EMDs are dispersed). Assuming the buyer does decide to move forward with the transaction, the deposit will go toward what the buyer owes at settlement; Typically, that would be the buyer’s down payment plus any closing costs owed.
I have been asked what deposit amount I would recommend a buyer to place on a home. A deposit amount, like everything else in an offer, is negotiable. However, I always recommend at least 1-2% of the sales price. Remember, the larger the deposit, the stronger the offer is, but, there is no law that mandates a specific deposit amount. If you are a seller, I don’t recommend accepting an offer with a deposit of less than 1% because if the buyer is considering backing out of the contract, this isn’t a large enough monetary loss for them to think twice. Now, if a buyer were to put down over two percent or to give a dollar figure example, say $20,000, one would assume that the buyer would certainly consider the monetary repercussions before bailing on a contract and forfeiting his/her $20,000 deposit.
No matter whether you are buying or selling, you should always consult with your Realtor® to advise the best strategy for you.