What is Earnest Money Deposit? As per Investopedia, Earnest Money is a deposit made to a seller showing the buyer’s good faith in the transaction. Earnest Money Deposit is useful in transactions where the buyer has an option to back out at a later date for any reason. If the buyer backs out of the deal, a portion or entire such deposit is forfeited. EMD acts as deterrent for the buyer to cancel the deal. At the same time, it provides some compensation to the seller if the deal is not closed. By the way, we encounter such situations on a very regular basis. For this very reason, during various transactions, we have to make advance payments. When you are renting a house, you need to some token amount to the owner at the time of verbal agreement. Subsequently, if you back out, the token amount is not refunded. Something similar happens when you are purchasing a property.
When local Housing Development Authorities such as DDA, MMRDA or any other Government Agency come out with housing projects, the demand is unusually high because of slightly lower prices. In fact, many investors also apply and try to sell at a much higher price as soon as (and if) they get the allotment. The development authorities put in a few restrictions to discourage such behaviour. The allotment is such cases in done through a draw of lots. If allotted, you need to make the payment within a few weeks or months to get possession of the house. Since the number of applicants is quite high and there is an option to back out even in case of successful allotment, there is a need to ensure genuine interest.
There are 2 ways to do it.
- Make the application a bit expensive. The fee is non-refundable (irrespective of whether you get the allotment) OR
- Ask the applicant to deposit a significant amount (as EMD or Registration Fee) along with the application
– In case you get the allotment and you complete the purchase, the EMD amount will be set off against the final purchase amount
– In case you get the allotment but you do not complete the purchase (surrender the flat), the EMD amount (a portion or entire) will be forfeited
– In case you do not get the allotment, the Earnest Money Deposit amount will be refunded (with some interest). Also, in case you cancel your application before the draw, you get back the entire amount
This ensures genuine interest in the property. There may still be cases where applicants may choose to forfeit the EMD amount. However, you can expect the number of such applicants to go down. Do note the nomenclature can vary across different schemes. For instances, EMD may also be called registration fee in some cases. However, so long as the nature and the purpose of the deposit/fee remains the same, you can think of it as Earnest Money Deposit.
You Can Get a Loan for Earnest Money Deposit
Your local development authority has come out with a housing project and you have a provide earnest money deposit/registration fee of Rs 2 lacs along with your application form. However, you don’t have Rs 2 lacs for this. How do you manage? Fortunately, for you, there is an option for a loan even for this amount. Many banks provide you a loan to deposit Earnest Money too.
How Do Such Loans Work?
These are short term loans to cover you for Earnest money or registration fee requirement.
- In case you do not get the allotment, the money refunded by the Urban Development Authority will be used to square off the loan. Any additional interest cost will be borne by you.
- In case you get the allotment but forfeit (a portion or the entire) deposit, you will have to pay to the bank lumpsum or in EMIs (depending upon terms and conditions in the loan agreement).
- In case you get the allotment and opt for the housing loan from the same bank, the EMD loan is set off from the home loan. If your housing loan application is rejected by the bank or you opt for a housing loan from another bank, you will have to pay back the loan lump sum or in EMIs.
I compare two Earnest Money Loan Products from State Bank of India and Bank of India.
| Features | SBI Earnest Money Deposit Loan | Bank of India Earnest Money Deposit Scheme |
| Minimum Age | 21 years | 18 years |
| Maximum Loan Amount | Up to 100% of application money. Maximum amount: Rs 10 lacs. | Up to 90% of application money. Maximum amount: Rs 10 lacs Additional Cap: In case of salaried, 12 times monthly income as per salary slip. For others, Annual income based on Income Tax return |
| Maximum Loan Tenure | 12 months | 12 months |
| Prepayment Penalty | No prepayment penalty | No prepayment penalty |
| Eligibility | Only Resident Indians can apply. No minimum income criterion. Third party guarantee or security in form of FDs, insurance policies etc. may be sought. | Everyone who meets criteria for Urban Development Authority is eligible (expect minors). Third party guarantee to be submitted. |
| Repayment | In case of successful allotment, lumpsum payment to be made. Can be adjusted against home loan amount by SBI. | If allotted, the loan amount can be adjusted against home loan to be sanctioned. If allotted but loan not sanctioned or taken, loan to be repaid in 12 installments. If not allotted, the refund amount will be appropriated towards settling the loan. Any excess interest to be borne by the borrower. |
| Interest Rate | 12.5% p.a. (as per SBI website on March 2, 2018) | No clear information provided on the website |
| Processing Fees | 0.5% of the loan amount + GST | Rs 500 + GST |
| Other Charges | Refer to SBI Website | Refer to Bank of India Website |
Should You Opt for Such Loans?
EMD loan comes at a cost. If possible, avoid. Do you have a choice? If not, you will have to go for Earnest Money Deposit Loan. However, you must know Earnest money is likely to much smaller than the down-payment required, in case you get the allotment. How will you manage the down-payment in a few months time? Food for thought.