The earnest money deposit is the buyer’s way of letting the sellers know that he or she is serious about buying their home. Earnest money is a sign that buyers are willing to put their money where their mouth is. Often the amount of earnest money is unimportant. In other cases, the more earnest money offered to the seller, the better.
In this area (Washington, DC Metro area), the earnest money deposit is identified in the offer to purchase, a copy of the check is included with the offer, and the amount is often an item of negotiation. The check may be cashed immediately upon contract ratification or following some other event specified in the contract, such as the removal of the home inspection contingency. Once the check is cashed, the money sits in a bank until settlement, and it is credited to the buyer at settlement against the total funds due at settlement.
How much should you offer? The answer is “It depends.” Is it a buyer’s market or a seller’s market. How important is it to impress the seller with your financial stability and strength? Remember that the money is being held in escrow until settlement. The money is not going away. Generally the stronger (more) the earnest money deposit, the more likely that the seller will look favorably upon your offer. The size of the earnest money deposit should be commensurate with the final sales price of your new home. A $500,000 home should get at least a $5000 earnest money deposit or even $10,000. The story is different in a seller’s market. The rules on earnest money deposits (and contingencies) change quickly in a seller’s market. Sellers often receive several competing offers on their home. They need to determine which buyer is the most serious buyer and they often judge this by the amount of earnest money offered. Earnest money is NOT a down payment. If you are new to the home-buying process, you may not realize that the earnest money you offer is not a part of your down payment. Rather it is a payment made to let the seller know that you want to buy his or her home. You do not give the money directly to the seller.The funds are held, generally by the title attorney, and credited at closing to the buyer’s benefit on the HUD 1 against the total funds due for closing. Give the earnest money to a trusted third party. In today’s day and age, you need to know where your money is going and protect yourself from theft. Unfortunately, people are not always who they claim to be. Your earnest-money deposit should be held by an attorney who agrees to place your deposit in a temporary trust. Get a receipt for your earnest-money deposit and ALWAYS ask questions before making the deposit. These questions should cover the refund policy and when the money will be released. Know the local laws. You cannot be expected to know every little rule about real-estate transactions in your area. Therefore, work with a real estate agent who knows the area and the applicable rules. Some topics to research include return policies, damage clauses in the event of cancellation, and release procedures. These all vary by location. The DC metro area requires the signatures of both parties before earnest-money funds can be released to either party. With a successful sale, this is rarely an issue and the money is released to the appropriate party at the specified time. However, if the contract is canceled or if a dispute arises, this requirement could cause trouble. When is the earnest money deposit check cashed? I always write my offers with a delayed deposit of the earnest money check. The check is then cashed after the removal of the home inspection contingency. However, you need to be prepared to cover that check once the home inspection contingency has been removed. Please note that Maryland law does not allow a real estate company to delay in the deposit of an earnest money check. However, if a title company is holding the earnest money deposit, it may wait until removal of the home inspection contingency – provided that both parties are aware the the deposit will not occur immediately.