Protect Your Earnest Money Deposit When Buying a Home

One of the first requirements when buying a home is an "Earnest Money Deposit" or "EMD".  The listing agent will suggest an amount in the MLS.   In Las Vegas 2-5% is typical for offers involving financing.  Cash offers may include a larger deposit.

When competing with other buyers, a larger EMD can be an advantage.  Sellers will view the offer that doesn't skimp on the deposit as a buyer that's more committed.  A healthy deposit combined with a clean offer can help win bidding wars in a seller's market.

What is an Earnest Money Deposit and Is It Necessary?

The EMD is often called a "good faith" deposit.  It's not your "Down Payment" on the home but counts towards the deposit at closing.  In NV and other escrow States, the EMD goes into escrow with the Title Company.  It's released to the seller at closing.  States like California require at least a $1 Earnest Money Deposit in order for the contract to be valid.

Home Sellers do not want to take their home off the market unless they have accepted an offer from a serious buyer.  When you provide an Earnest Money Deposit, you are demonstrating to the sellers that you intend to purchase their home.  

Why would a buyer agree to forfeit their EMD?  

There are situations where a buyer may be serious about purchasing the home but encounters an obstacle.  Typical situations include a delay in getting the mortgage approval or a delay in the closing on the sale of your current home.  The buyer wants to buy the home but the seller demands something in exchange for extending the close of escrow.  They may give the extension if the buyer agrees to an early release of the EMD.  The escrow officer will require all parties to sign paperwork authorizing the early release of the funds.

Another option is having the EMD "go hard".  By "going hard", the EMD is non-refundable.  The buyer signs paperwork instructing the escrow officer that the EMD is non-refundable.  The deposit remains in the escrow account and the seller receives it at closing or if the buyer cancels the deal.  In either case, the buyer agrees that if they cancel the escrow they lose the EMD.  

Releasing the EMD or allowing it to go hard is not advisable under most circumstances.   You should only consider these steps if you are confident you're getting a good deal on the home.  You should be confirm that an extension will allow your lender to close the deal.

Can you Cancel the Deal Without Losing Your Earnest Money Deposit?

Most Residential Purchase Agreements include contingencies.  Here are some situations where you may be able to cancel your offer without risking your EMD - 

When you make an offer on a home you will include contingencies in the offer.  You will have a specific number of days to perform all inspections.  This is also known as your "due diligence" period.  It specifies that amount of time a buyer has to perform their inspections.  In Las Vegas, the due diligence period averages from 7 to 10 days.  

You can decide to cancel based on issues found during an inspection.  We have seen this happen when an inspector discovered mold in a home.  Some buyers don't want to buy a home that has had mold issues, even if they're remediated.  In this situation, the buyer has the option to cancel and their EMD is safe.

Most inspections uncover some items, even on new construction homes.  Most of the issues are usually minor.  An electrical outlet that doesn't work or a leaky faucet.  Minor issues are usually negotiated.  The seller may agree to repair them or to pay for the cost of doing them at closing.

If you are unable to reach an agreement about the repairs you may cancel the contract.  You can cancel without risking your Earnest Money Deposit if you do so within the Due Diligence Period.

Common Interest Community documents may allow you to cancel without forfeiting the EMD.  Sellers must provide a copy of the current HOA documents for the buyer to review.  If the buyer doesn't understand the documents, they have the option of reviewing them with their attorney.  

When you receive the HOA documents, you have five days to complete your review.

You should verify that they will be able to use the home as you intend.  Many HOAs will not allow owners to park commercial vehicles overnight.  The homeowner who drives a van with their business name on it will regret buying into a community with this restriction.  In fact, home owners who wish to park commercial vehicles in the driveway may be wise to consider buying a home that isn't in an HOA.  

Discovering that you cannot abide by the HOA rules is cause for canceling without forfeiting the EMD.  It's important that you do so within the 5 day period you're allowed for reviewing the HOA documents in most States. 

If using a mortgage, you will have a financing contingency.  The lender will order an appraisal.  The standard contract in Nevada allows a few options in the event the property doesn't appraise.  

• The seller and buyer agree to adjust the price to the appraised value.  
• The appraisal can be challenged and a new appraisal ordered.  The second appraisal is usually at the buyer's expense and there is no guarantee it will be better than the original appraisal.
• The buyer can pay the difference between the appraised value and the purchase price out of separate funds.  
• The buyer and seller can compromise on a price that's somewhere between the appraised value and the offered price.  In this instance, the buyer will still have to pay anything above the appraised value out of separate funds.  
• Or the deal can be cancelled.  The seller is free to put the home back on the market.  The buyer receives a refund of their Earnest Money Deposit.

In the event there are no appraisal issues, financing is still a contingency.  Most sellers want to see a formal "pre-approval" letter with any offers that involved financing.  Even with a pre-approval letter, the buyer may still sabotage the mortgage.  Sudden changes in employment or balances on credit cards can sabotage your mortgage at the last minute.  After exhausting all mortgage options, you may still be able to cancel without forfeiting the EMD.

Do you still need an Earnest Money Deposit with 100% Financing?

Yes.  There are fewer mortgages that offer 100% financing in today's mortgage market.  VA loans are still an option for active military and vets who want to buy without making a down payment.  There are USDA loans with Zero down in "rural" areas.  Unfortunately, we don't qualify for the "rural areas" in Las Vegas.  

Purchasing the home with a VA or USDA loan that will provide 100% financing?  You still need to offer an Earnest Money Deposit.  It will provide that "good faith" gesture to show that you're a serious buyer.  It will be at risk if you fail to perform after all contingencies are met.  When you close escrow, the EMD will be applied to any closing costs or credited back to you.

Before You Offer that EMD 

An Earnest Money Deposit is necessary when buying or selling a home.  The amount should be enough to assure the sellers that you are a serious buyer.  You can lose the EMD if you don't perform inspections, review documents, etc., within the specified time frame.  

Be sure you want to buy that home before you make your offer.  It isn't unusual for buyers to get one home in contract while they continue viewing other options.  No wonder sellers want a strong EMD before accepting your offer.  It's better to be certain this is the home you want before entering into a contract.

As a seller, the amount for the EMD should be enough to cover at least part of your mortgage while you take the home off the market.

Related Links

• How To Buy a Home in a Seller's Market
• 10 Commandments to Keeping Your Mortgage Approved!
• Top Ten Mortgage Mistakes to Avoid