So, the Earnest Money Deposit (EMD). What is it? How is it used? Is it refundable? This one was quick and easy.
The Earnest Money Deposit is also known as the "initial deposit" made by the buyers when buying a home. It is money that gets put up front, and is held in escrow, while buyers complete their inspections and check items off their list for their contingencies. It is pre-written to submit the deposit within 3 business days of the accepted offer.
The deposit IS refundable if the buyer cancels within their contingency time frames. Actually, that is what the protection of the "contingency" is for. So they don't automatically lose that deposit if they decide to back out of the purchase. However, once the buyer physically signs the contingency removal form, the deposit then becomes non-refundable.
Once the buyer is ready for the next step and close on the purchase of the home, the EMD would be used towards the down payment and closing costs. If the buyer expected to pay $50,000 upfront for the home and the EMD that is already in escrow is $10,000, then they would only have to bring an additional $40,000.
Basically, once contingencies are removed, the buyers are signing that they are satisfied with everything they found out about the home and are committing to moving forward with buying it. If they got cold feet after that point, or something happened with their qualification status, and decided to not follow through with buying the home, the seller could keep the EMD as "liquidated damages".
The contracts can be altered if agreed in writing by both buyer and seller. So, always confirm with your Realtor what the refund policy of the EMD is and what your rights are as a buyer or seller. The above is just the basic explanation of circumstances that could happen based on the pre-written California Purchase Agreement.
See our blog posts on Contingencies for more information: