Hard Money Loans

When you start the process of buying a home or any type of real estate, you’ll no doubt hear the term “earnest money deposit” (EMD). So what exactly is an EMD?

An EMD becomes relevant when you are ready to make an offer on a property. In most states, your Real Estate Agent prepares the offer on your behalf. The offer usually takes the form of a written contract that is submitted to the seller by way of their agent.

In addition to the offer document, sellers typically expect an EMD. An EMD is a monetary deposit submitted via check to demonstrate to the seller that you are a serious buyer. In some regions of the country, only a photocopy of the check is submitted with the offer, and the original check is delivered to the appropriate entity if the offer is accepted. Ask your Real Estate Agent to clarify how deposits are handled in your region of the country.

The check is usually made out to an independent third- party such as a Title Company, Escrow Company, Real Estate Attorney or your Real Estate Broker. Ask your Real Estate Agent to clarify who will hold the EMD.

The amount of the EMD sellers expect varies by region. The EMD amount is based on the customs and practices for a region, but is generally from 1% to 2% of the purchase price. In a competitive market place where demand exceeds the supply of homes, some buyers may offer a higher EMD than expected to impress the seller of their intent. In determining the amount of your EMD, consult your Real Estate Agent and balance the need to demonstrate your serious intent, against the good business practice of minimizing the deposit amount.

The amount of the EMD is usually applied to reduce the purchase price of the property or to cover closing costs, as you dictate. For example, if you are purchasing a $300,000 property and you give an EMD of $3000, then the remaining balance owned at closing is $297,000 (plus closing costs). Alternatively, you may direct that the EMD be applied toward the closing costs.

Once a valid contract for purchase is created, an independent third-party usually holds the EMD until the purchase is either completed or cancelled. At this point, the money belongs jointly to both the seller and the buyer.

In cases where you make an offer that is accepted but later decide to cancel the offer, the terms specified in the contract (or state law) will dictate if, and under what circumstances, the EMD is returned to you. Be aware that you could loose your deposit if you do not not comply with the terms of your contract. Your Real Estate Agent can provide you information about how EMDs are dealt with if a contract is cancelled.

Since state law varies by region and practices can differ even within the same state, be sure to consult your Real Estate agent about the rules that apply to EMDs in your region of the country. You should also be aware that the EMD is not related to any down payment that you make toward your home loan.

For those who have played in the real estate game, the term earnest money deposit may be old hat. However, for those new to buying a home, the phrase may be completely foreign.

In simple terms, an earnest money deposit is a good faith deposit – a signal that the buyer is seriously interested in a property. While this can be a negotiable amount, it is not to be confused with a down payment.

How much do you need to deposit?

The amount of money acceptable varies from purchase to purchase, and may take in a number of factors. In areas where the market is hot, or strong, the buyers with the larger earnest money deposit offer may show the seller that they are more serious than others vying for the home.

Depending on the part of the country, such as coastal cities, earnest money deposits could be as high as 5% (or more) of the sale price. In smaller communities, it could be as low as $500 to $1,000.

Monies can be in the form of a personal check, a cashier’s check, a money order or cash.

Don’t make your check payable to the seller!

If the seller accepts the offer, a real estate broker, or a lawyer, holds the earnest money in escrow. Once the sale reaches the closing stage, the monies are applied to the remaining costs.

Do your research before you write the check.

One story tells of a woman who claims she lost a $2,500 earnest money deposit when she gave it to a person claiming to be a real estate broker, with official business cards and office stationery. He was a fraud and disappeared soon after. When she contacted the police, she learned she was not his first victim. Unfortunately, her money was gone.

Once a contract for the offer has been signed and the earnest money has been accepted by the seller, the buyer then has a finite amount of time to come up with the rest of the deposit. During that time, factors such as securing financing, home inspections, or other considerations can be handled.

In some states, buyers can pay an Option Fee, allowing them to walk away from a deal for any reason at all, within a certain period – usually 5 days to 2 weeks. If the deal goes ahead, this fee is applied to the purchase.

If the deal falls through, both the buyer and the seller must instruct the escrow company in writing to cancel the transaction. The funds are then returned to the buyer, minus a small cancellation fee.

If the buyer retracts the offer without reason, or at some point fails to meet the terms of the contract, the earnest money is forfeited.

For information about Minnesota condos, go to MinnesotaLoftsAndCondos.com. There you can search all Downtown Minneapolis condos for sale, in addition to getting the latest market information for the Twin Cities area.

Article Source:http://www.articlesbase.com/real-estate-articles/what-the-heck-is-an-earnest-money-deposit-1304442.html