Earnest Money
Also known as: Good Faith Deposit, Earnest Money Deposit, EMD
A deposit paid by the buyer when signing a purchase agreement to show they are serious about buying the home. In new construction, earnest money is typically held by the builder or a title company and applied to the purchase price at closing.
Detailed Explanation
When you sign a purchase agreement for a new construction home, the builder typically requires an earnest money deposit. This deposit serves as a financial commitment — it shows the builder you intend to follow through with the purchase, and it compensates the builder if you cancel.
Earnest money deposits for new construction are often larger than for resale homes. While a resale transaction might require 1-2% of the purchase price, builder contracts may require 3-5% or more, sometimes collected in stages (an initial deposit at signing, additional deposits at milestones like lot selection or design center appointments).
The critical question is what happens to your earnest money if the deal falls through. Most builder contracts include a deposit forfeiture clause that allows the builder to keep the full deposit as liquidated damages if you fail to close.
In Your Contract
Look for terms like "earnest money," "good faith deposit," "initial deposit," or "liquidated damages" in your purchase agreement. The deposit amount, payment schedule, and forfeiture conditions are typically in the first few pages of the contract.
Key Points
- 1Earnest money is typically 1-5% of the purchase price for new construction.
- 2Most builder contracts allow the builder to keep your deposit if you cancel.
- 3Some contracts require additional deposits at construction milestones.
- 4Deposit forfeiture conditions vary — read them carefully before signing.
- 5State law may limit a builder's ability to keep your entire deposit in some circumstances.
- 6Get the refund conditions in writing before you pay.
Related Content
Have a new construction contract? Scan it for $49 at fineprint.homes
Scan Your Contract