What is Earnest Money Deposit means?

An earnest deposit meaning, is a sum of money that a buyer deposits to a seller (or in a tender / auction or purchase agreement) as a demonstration of good faith and serious intent to go ahead with a transaction, such as buying a property. It assures the seller that the buyer is not just making an offer casually, but is committed.

What Does Earnest Money Deposit Means?

• In typical real-estate deals, when the purchase agreement is signed (or sometimes during offer submission), the buyer puts down EMD, usually a small percentage of the property’s asking price, often between 1% and 2%, though in competitive markets it can be higher.

• This amount is held in an escrow or trust account until closing of the transaction. If all the conditions of the contract are fulfilled and the deal is successfully closed, the EMD is credited toward the buyer’s down payment or closing costs.

• However, EMD also serves as protection for the seller: If the buyer decides to withdraw from the deal for reasons not covered in the contract (i.e. without valid contingencies), the seller may have the right to retain (forfeit) the earnest money.

• Conversely, if certain “contingencies” are part of the agreement (such as unsatisfactory property inspection, low appraisal, inability to get financing etc.), and those conditions aren’t met, the buyer can typically get their EMD back.

• In Indian contexts, EMD is also used in government / private tenders / bidding processes: bidders must deposit EMD to prove their seriousness. If they win, EMD may be adjusted / returned according to the outcome; if they fail to abide by terms, it might be forfeited.

You should always use escrow or other neutral third parties to hold the deposit, obtain receipts, and keep timelines.

.

I was helping out my cousin when he was buying a property in Greater Noida a few years ago. The developer asked him to make the earnest money deposit and we were both confused. We didn’t know what it meant until then. We asked him about it and he politely answered telling us that it means security deposit money. 

So what is earnest money deposit? It is a deposit paid by the buyer with an intent to buy a property. The earnest money provides a window to the buyer to conduct due diligence of the seller and property, arrange funds and make inspections.

Now that you know what is earnest money deposit means, let us understand a few more things about protecting earnest money deposit.

• There must be a contract which mentions contingencies for funding and inspections.

• Understand the terms and conditions clearly before signing a contract

• You can keep the earnest money deposit in an escrow account and get a receipt for payment of earnest money deposit.