An Explainer: Earnest Money Deposit

Paying Earnest Money deposit is a usual practice when you are showing your intent of buying an asset, which is high in value. This is a reason why paying of a token amount is a standard practice followed in real estate transactions across the world.

In simple terms, Earnest Money deposit is the amount a buyer pays to show that his interest in a said property is genuine. The money is often paid once a verbal acceptance upon an offer has been made. The Earnest Money deposit is also known as a binder, token money or good-faith deposit. A buyer can pay one per cent of the total value of the property as token. After the token money is paid, the buyer and the seller are both under obligation to carry forward the verbal agreement.

However, this must not be confused with down payment. Unlike earnest deposit, down payment is the amount you pay upfront to buy a property. The payment of the former shows your intent of buying is genuine; the latter guarantees the purchase is on its way to realise. In cases where a home buyer avails of a home loan from a bank, he is expected to pay 20 per cent of the property value as down-payment; the remaining amount is usually financed by banks.