Quick Answer

An earnest money deposit (EMD) is money a buyer puts down after signing a purchase contract to show they are serious. It is held by a title company, attorney, or escrow agent and credited to the buyer at closing. If the buyer backs out without a valid contract reason, the seller may keep it.

What Is an Earnest Money Deposit (EMD)?

Earnest money is a good-faith deposit. It shows the seller you intend to close, and it gives the seller something if you walk away for a reason the contract does not allow. It is not an extra cost: at closing, it counts toward your purchase price or closing costs.

The amount, the deadline to deliver it, and the point where it becomes non-refundable are all set in the contract. In investor deals, these terms are often tighter than in retail sales.

How Earnest Money Works

  1. Contract signed: the buyer and seller agree on the deposit amount and the deadline to deliver it, often a few business days.
  2. Deposit delivered: the buyer sends funds to the escrow holder named in the contract, usually a title company or closing attorney.
  3. Contingency period: if the contract has an inspection or due diligence period, the buyer can usually cancel during it and get the deposit back.
  4. Closing: the deposit is credited to the buyer on the settlement statement.

Example: The purchase price is $135,000 and the EMD is $5,000. At closing, the buyer brings $130,000 plus closing costs, because the $5,000 is already held in escrow.

When You Can Lose Earnest Money

Read the contract. In general, a buyer risks losing the deposit if they:

  • Miss the closing date without an agreed extension.
  • Cancel after the inspection or due diligence period ends.
  • Fail to perform under the contract in some other way.

Some investor contracts make the deposit non-refundable from day one. Others release it to the seller at a set point. Know which one you are signing. Rules on how deposits are held and released vary by state; this is general information, not legal advice.

Earnest Money in Wholesale and Off-Market Deals

When you buy a deal through an assignment of contract, you usually pay your deposit under the assignment agreement. It may be non-refundable and is normally credited at closing.

Get the terms in writing, and make sure the money goes to a title company or closing attorney, not to a personal account. Have your proof of funds ready too, since sellers often ask for both.

Frequently Asked Questions

What is an earnest money deposit?

An earnest money deposit is a good-faith payment a buyer makes after signing a purchase contract. It is held in escrow and credited to the buyer at closing.

How much earnest money should an investor put down?

There is no fixed amount. It is negotiated and depends on the price, the market, and how competitive the deal is. A larger deposit makes an offer stronger but puts more money at risk.

Is earnest money refundable?

It is usually refundable when you cancel under a contract contingency within the allowed time. After those periods end, the seller may be entitled to keep it if you do not close. Some investor contracts make it non-refundable from the start.

Who holds the earnest money?

A neutral party named in the contract holds it, usually a title company, closing attorney, or escrow agent.

Related Terms & Guides

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