A good faith deposit in a real estate transaction is an amount of money that is offered to the home seller as an act of intent to buy. This amount is offered to the seller and set aside in escrow as a signal that the buyer is serious about purchasing the home. It is typically used as a part of the down payment when the sale goes through, though it is not the same thing as a down payment.
What Is Good Faith Deposit Money?
Good faith deposit money is also known as “earnest money.” It is money laid down specifically to show the home seller that you’ve got skin in the game. It is a separate amount from the down payment, which is the amount of money the lender requires for a loan. By offering a good faith deposit, you are demonstrating to the seller that you won’t walk away from the deal.
Do You Need a Good Faith Deposit Money?
It depends. A good faith deposit is not strictly necessary for buying a home. But earnest money can make you stand out among other buyers if you are vying for your dream home amidst competition. This is especially true in a seller’s market.
How Much Earnest Money Is Needed?
A good rule of thumb is offering 5% of the home price as a good faith deposit. This should be enough to cover costs for the seller if you should walk away from the deal. For example, if you are buying a house for $300,000, then an appropriate amount of earnest money would be $15,000. Generally, the higher you can go, the better, especially in a competitive market where there are more buyers than sellers.
Is a Good Faith Deposit Refundable?
Say that the close doesn’t go through for one reason or another. Do you lose your good faith deposit? Fortunately, there are contingencies in place to protect both buyer and seller from losing out if a home sale transaction can’t be completed. Let’s takes a look at a few of these.
An appraisal contingency allows the buyer to back out of the purchase if the property is not appraised at the amount of the purchase price stated in the contract. A seller may try to renegotiate and bring their price down to bring it more in line with the amount named by the appraiser. However, if an agreement cannot be reached, a buyer may back out of the deal without consequence.
A financing contingency (also known as a mortgage contingency) gives the opportunity for buyers to back out of closing and reclaim their earnest money if they can’t secure financing at acceptable terms.
Home Inspection Contingency
A home inspection contingency states that a buyer has a specified amount of time to conduct inspections on a home. If the results of the home inspection are deemed unacceptable to the buyer, then the contract is null and void and all deposits are returned.
Contingency for Selling an Existing House
It can feel a bit like juggling trying to sell a house while trying to buy a new home. It’s a good idea to sell your existing home before buying a new one, but in some cases, it can’t be helped. When this happens, a home sale contingency exists to give the buyer a certain amount of time to sell their existing home to finance the new one. This contingency protects the buyer because if they cannot sell their home at their asking price, they may back out of the home sale.
Taking Care of Your Good Faith Deposit Money
Good faith deposits can be a significant amount of money, dependent on the price of the house. It is imperative to protect your investment by using a real estate agent or real estate lawyer for your transaction. Ask questions if there’s anything in your contract that you don’t understand. Review property disclosures (these are a requirement in most real estate markets) carefully. Make sure all contingencies are in place. Do not cave in to pressure from the seller to remove them until your loan has been approved, the house has been appraised, and an inspection has been done.
While not necessary for lenders and not always required by home sellers, a good faith deposit is an excellent way to be a competitive buyer. A seller’s market makes earnest money even more desirable and could make the difference when multiple contract options are placed in front of a seller. When planning to purchase a home, it is best practice to save a sum aside as earnest money on top of any required down payment. This will ensure you won’t get left behind when you finally find your dream home.
When you are ready to house search, reach out to the experts at Hero Home Programs™. They will work hard to save you money during the home buying process by setting you up with local appraisers, inspectors, and more. They will also do their best to find local grants that may be available to you. Let your Hero Home Program experts help you today.