What does earnest money deposit mean?

Updated: Friday, May 26, 2017, 15:26 [IST]

If you have applied in a tender, it's almost impossible that you would not have heard the term "earnest money deposit".

It's nothing but the amount that a buyer gives to the seller to show his inclination in successfully completing a deal. If the amount involved is rather large then an escrow account is opened and the money is held in the same account.

In the case of tender, the amount is made known well in advance, during the launch of a tender. For example, Company XYZ may ask for an earnest money deposit from the bidder for a roads project. The sum would depend on the company and in many cases the deposit could be large if the contract is large.

What happens to earnest money deposit in tender in India

In case a tender has not been awarded then the company that had collected the amount has to refund the same. Generally, there is no interest that is applicable on the earnest money deposit amount in India.

Earnest Money deposit while buying a home

The practice of taking this deposit amount is very much prevalent in the West. In fact, very few transactions can be completed without an earnest money deposit. The amount of money you pay is a percentage of the property may vary from seller to seller, but, on an average it is estimated that the earnest money deposit could be easily around 1-2 per cent of the property value.

As mentioned earlier if the transaction does not go through the amount would have to be refunded. Insist on a clause that has a refund, even it means a small cancellation fee that is charged. If you find problems with the property, you should insist on getting the money back.

In some cases where the earnest money deposit is rather large, a buyer may reduce the price of a home.

Is Earnest Money Deposit the same as Down Payment?

No, Earnest Money Deposit is not a part of Down Payment. Earnest money deposit is for displaying your commitment towards the project to the seller. Down payment means the initial payment you do while you are buying something on credit. It can be a property or vehicle or anything. For example, f you are buying a bike worth eighty thousand and you are paying twenty thousand while buying and rest you will be paying in installments. In this, the twenty thousand you paid is called as down Payment.

The main difference between an Earnest Money Deposit and Down payment is, Earnest Money Deposit is like taking time from client inorder to buy some time to find the money required to complete the transaction and the down payment is the payment done with the necessary funds to complete the transaction. In a way, Earnest Money Deposit turns into down payment if you have sufficient funds to start the project.

Disputes arising out of earnest money deposits

Many a times it is highly possible, that there could be a dispute that could arise on account of earnest money deposits in india. This is largely because of worries over delay in returning the money or a breach somewhere down the line. It is important that the dispute be resolved amicably.

Sometimes, if the money is large it could boil down to several difficulties in getting the money back.