What is a good faith deposit?

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Real Estate

The concept of good faith deposit is quite important in real estate deals. Once you’ve found the house of your dreams and are willing make an offer, a good faith deposit (earnest money paid by you) lets the seller and the real estate agent know that you have decided to go ahead with purchasing the home. It signifies the seriousness of the buyer and marks the property deal initiation.

Good faith deposit or earnest money is usually safest deposited into an escrow or a trust account jointly held by the seller and buyer when the offer is accepted; it signifies that he or she is willing to or has the intention of completing the real estate deal. In most cases, the deposit amount will be a percent of the total amount owed by the buyer. It protects the interest of both buyers and sellers involved in the deal.

A few things that every home buyer should know about good faith deposit are listed below:

·         The deposit is not paid by the buyer until the offer is accepted: Typically, the buyer will dispense funds in the form of check, cash, credit card, or other form of money to the closing company once the sale contracts are ratified. No money is paid until the sellers have agreed to your offer, when the money goes into escrow.

·         Good faith deposit is not an additional Cost: Remember this is no extra cost. It will be subtracted from the down payment if the deal goes through as planned.

·         Sellers are not willing to accept offers without a good faith deposit:  To protect the interests of the sellers and bring discipline & commitment into property deals, sellers rarely accept offers without a good faith deposit. This has become a common and expected practice when making offers.

·         Good faith deposit ranges from 1% to 3% of the home’s purchase price: The common factors that influence the amount of good faith deposit are local state regulations, current market conditions, and the seller’s preferences. Sometimes a slightly higher good faith deposit can be the tipping point of an offer.

·         Good faith deposit should go into an escrow account:  As a home buyer, make sure that you are depositing this money into an escrow account with the firm or broker handling the deal and never to the seller's account directly. This is to ensure that everyone’s interests are protected.

·         What happens to good faith deposit if the deals fall through: In case the deals doesn’t work for any party, the good faith deposit generally goes to the party that is not responsible for the breaking the deal. It’s paid to the buyer if the seller backs out or the seller if buyer pulls the offer.

·         The fate of good faith deposit in case of no financing: Buyers usually get the deposit back if the financing is declined by the lender after a nominal cancellation fee is charged.


It’s very important to include a good faith deposit in with your offer to let the seller know that you are serious and to initiate the dealing process. However, be sure that this is the home for you because your deposit could be paid to the seller if you back out.

Please leave a comment below if you have any questions or thoughts about this post!