At the very least of reserving a venue for a party, booking a vacation early or scheduling a contractor to begin work on a project; you’ll need to put down a deposit! This not only locks in your date, but makes sure that if you unexpectedly back out, the vendor is entitled to keeping your deposit to reimburse them for any damages or missed opportunities while keeping your slot. An Earnest Money Deposit for a real estate transaction works the very same way!

Buyers stand to lose their earnest money if they jump ship to early in contract. An EMD gives sellers monetary assurance that a buyer won’t back out of the contract without valid cause in addition to agreeing to part ways with the deposit if they do.

Most contracts have a contingency period that allow buyers to walk away from a home and recover most of their EMD if unfavorable issues are uncovered during inspections, or if the buyer cannot qualify for financing.

But, if a buyer decides to cancel the contract for a reason not covered by a contract contingency, then ultimately the earnest money is generally forfeited to the seller.

Sellers very rarely accept offers without deposits and it is important to note the EMD funds used to open escrow upon an accepted offer apply toward the down payment and closing costs.

The earnest money amount will vary according to your area, seller and price of home you’re considering. The best way to determine local customs is to talk to an experienced real estate agent. Your earnest money deposit could range anywhere from 1-3% of the purchase price, however so much depends on the specific property, the competitiveness of the market and other market-specific factors.

A competitive market might mean you’ll need to put down a larger EMD to accompany your offer. Most agents agree that buyers should include an earnest money amount that will be taken seriously, but not so much that a buyer’s finances are at risk. It’s unlikely that you’ll lose your earnest money deposit, but it is important to protect yourself and your agent can help guide you through this process.

After your offer is accepted and both parties have signed the purchase agreement your deposit is required to be given to a third-party escrow agent, such as the title company, within 3 business days of acceptance via check or wire transfer.

After turning over the deposit, the funds are held in an escrow account until the home sale is in the final stages. Once everything is ready, the funds are released from escrow and then will applied to your down payment.

The terms of the contract decide where earnest money lands, if the contract is broken. Let’s say that a buyer’s contract has made the final purchase contingent on the results of an inspection. If the inspection reveals problems that are unacceptable to the buyer, the buyer can walk away from the home with his earnest money in tow. If the buyer backs out just due to a change of heart, the earnest money deposit will be transferred to the seller.

Make sure to work with a reputable, experienced real estate agent when crafting your offer. A good contract with proper contingencies is essential in protecting your earnest money deposit.