By Jesse McCarl
Welcome to HouseHunt’s BASICS Series, where we take a look at the questions of every homeowner and potential homeowner.
If you’re a first-time buyer, you can get very far into the process before you first hear the term ‘good faith deposit.’ This can be frustrating because it’s basically extra money you spend on the front-end (when you’re already tight on finances) in order to be taken seriously as a new buyer. This post will take a look at what you need to know about this often overlooked term.
What is a Good Faith Deposit?
A good faith deposit is often called an earnest money deposit. This is money that is submitted at the same time as the contract with your proposal and offer. The reason for this extra cash is to show that you are serious as a buyer. It says, “I want your property, and I’m willing to prove it by putting up some cash (in good faith) before we even get around to the down payment.”
Sure, you’ve already been pre-qualified and pre-approved, but frankly that only matters to the banks and brokers. For the people actually selling their home, all they care about is green. Putting some money in view right off the bat is a customary step that will make your offer as appealing as possible.
The good faith deposit is not to be confused with a down payment. There are probably ways to sneak into the contract that your earnest money is a portion of a down payment, but that likely won’t work in your favor. Both will ultimately go towards paying off that house, but they are viewed by the seller as two separate entities.
How Much is It?
As with a down payment, there is no set amount for a good faith deposit, but there are recommended amounts to a) appeal to the seller, and b) protect yourself. It is also important to remember that this amount varies greatly depending on if you’re operating in a buyer’s or seller’s market. If there is more inventory than there are buyers, your good faith deposit becomes a lot less significant!
1-3% of the cost is customary for an earnest money contribution, although you could technically offer as little as a dollar. Your real estate agent will know the best offer given the market conditions. Since the seller is required to handle closing costs, they are often looking for a good faith deposit that will cover that portion.
How to Go About It
The name “good faith” indicates that you are good for the money you’re offering on the home. However, it also implies you’re being vulnerable with this money. Don’t worry! That is not the case!
The earnest money does not go directly to the seller. It goes to a reliable third party, usually the escrow office. As the buyer, you are also advised to obtain a receipt for your deposit. This ensures that if, for any reason, the contract doesn’t go through, you can get your money back!
Because it tends to be a smaller amount, the good faith deposit is usually overlooked in the real estate transaction discussions. Regardless, we don’t want it to sneak up on you when you already have so much going on to try to close on a home! We hope that this brief overview of the subject empowers you to go into the process more aware. Once this is on your radar, you can let your Realtor handle the details, and you’ll be in your dream home in no time.