Real Estate 101: Earnest Money

What is Earnest Money?

Earnest Money is a deposit a buyer puts down when purchasing a home (EMD). The amount of the deposit is negotiable. While EMD is not technically required, a deposit between 1% to 2% is customary when getting a loan. When paying cash, the EMD is generally higher, up to 10%. Basically, EMD shows that a buyer has an earnest intention to buy and is willing to put something on the line. In Nevada, the EMD is commonly held by a neutral third party: the title company handling the transaction.

When does the buyer get their Earnest Money back?

In NV, the contract is fairly straightforward. The contract indicates the EMD will be returned to the buyer if they cancel the contract within a contingency period (e.g. an unacceptable home inspection, an appraisal value issue, or the inability to secure a loan). A contract can also be canceled if a seller cannot provide a free and clear title or if a review of the HOA documents reveals something unacceptable to the buyer. More commonly, we work through any issues that arise and the earnest money is credited toward the buyer's down payment at the closing!

When can the buyer lose their Earnest Money deposit?

A buyer risks losing the EMD if they change their mind about buying the property after all contingencies have expired. The EMD could also be at risk if a buyer fails to perform contractually agreed-upon tasks, such as ordering the appraisal in a timely manner or providing requested documentation to their lender. If a buyer defaults on the contract, the seller can argue to keep the EMD. However, both parties must agree on what happens to the EMD. It's not always an easy process. The funds remain in escrow until closing or until both parties agree, sometimes through an arbitration process or a legal determination is made on who is entitled to the money if the transaction is canceled.