Good faith deposit, earnest money — you’ve likely come across these terms during your search for a new home. But, what exactly do they mean? And more importantly: how can they help you as a home buyer? Understanding these concepts is essential to the success of your offer and securing the purchase of your new home.
What Is a Good Faith Deposit?
Put simply, a good faith deposit, also known as earnest money, is money a buyer puts forth when making an offer to demonstrate that they are serious about their proposal — i.e. that the offer is being made in “good faith”. A good faith deposit helps the seller trust that the buyer won’t back out of their purchase contract without just cause.
Why is this important? When an offer is accepted, both parties enter into a purchase contract. While this contract doesn’t require the buyer to actually complete the purchase, as issues with the home could turn up during inspection or appraisal, it does require that the seller take their property off the market while it’s being inspected and appraised. This means that accepting an offer means sellers lose out on other potential buyers should the deal fall through.
Since sellers need to incur this risk, they want to be sure that the buyer won’t jump ship without good reason. The good faith deposit provides the seller with that assurance, rendering them more likely to accept a buyer’s offer.
How Much Should You Put Down for a Good Faith Deposit?
In general, a good faith deposit will hover around 1% to 3% of a home’s purchase price. However, the amount of money you will need to put forward to keep your offer competitive is highly dependent on the real estate market that you’re looking to buy in.
In markets that are particularly hot, you may need to put down more to make your offer stand out from the rest and get taken seriously. On the other hand, in less competitive markets you may be able to get away with a much smaller deposit.
The more earnest money you put forth, the more attractive your proposal will be to the seller. This is especially important in markets with lots of buyers competing for a small number of homes. Working with an experienced real estate agent who knows your region’s market can assist you in figuring out the right deposit amount to keep your offer competitive. They can even help you get some money back after your purchase as well.
It’s important to note that a good faith deposit should never be paid directly to the seller; instead, the money should be placed in an escrow account. Upon closing, the earnest money will be applied towards the buyer’s down payment.
Protecting Your Good Faith Deposit
If you’re a buyer and you back out of your purchase contract without a solid reason, you will likely lose your deposit. So what does count as a valid reason for backing out? This will depend entirely on the contract that you sign with the seller.
Any purchasing contract should have a number of contingencies which, if not met by either side, will allow either party to exit the agreement. For example: a buyer who is putting their current home up for sale may include a contingency that they will only move forward with the purchase if their home is sold by a certain date.
If it turns out that they do not close on their house within the agreed upon timeframe, the buyer can rescind their offer and recollect their earnest money from the escrow account.
On the flip side, if a buyer includes the contingency mentioned above, but then decides they don’t want to move forward with the purchase because they found a house they like more down the street, they will not have their deposit returned. This is why good faith deposits are important: they protect sellers by providing a monetary guarantee that a buyer is serious about their offer.
If you’re ready to buy a house and want to have the best shot at securing your dream home, Clever can help! Clever Partner Agents are top-rated, full-service real estate agents from major brands like 21st Century, RE/MAX, and Keller Williams. What’s the Clever difference?
Clever has a large network of agents who have already agreed to a buyer rebate of up to 1% of the final purchase price, no negotiation necessary. If you’re interested in speaking with a Clever Partner Agent and seeing how they can help you make a competitive offer, just fill out our online form and someone will be in touch shortly.