How Much is a Good Faith Deposit?

The homebuying process can be stressful, but once you have found a home that you adore, it can all be worth it. However, the work is not over yet. At that point, it is time to submit your offer to the seller and that includes a good faith deposit.

Also called an earnest money deposit, this money represents your commitment to seeing the sale through to closing day. But how exactly do good faith deposits work? And how much will you be expected to contribute? Today, we will answer your pressing good faith deposit questions. That way, when you find the right home, you will be ready.

What is a good faith deposit in real estate?

A good faith deposit is an up-front payment made by homebuyers who are submitting an offer for a home they wish to purchase. It is a way of showcasing their commitment and serious intent to buy the home. This is because once a seller enters into a purchase agreement with a buyer, the house is taken off the market in order for the transaction process to begin.

In the event that a deal does not come to fruition, or a buyer decides to back out of the sale, the seller must start the listing process all over again. That can result in a significant financial drawback. However, the good faith deposit is there to protect the seller in these cases. These funds are held in a trust or escrow account that is controlled by a neutral third party (such as a title company or real estate broker) who includes limitations in order to protect both the buyer and seller.

Your good faith deposit will remain in this account until the purchase conditions or contingencies have been met by all parties involved in the transaction. Once these conditions are satisfied, the funds are released to the appropriate recipients. It is important to note that you should not be giving your deposit directly to the seller. Without a third-party entity involved, you will not be protected or have any recourse for having your good faith deposit returned if the sale falls through.

How much does a good faith deposit cost?

Your good faith deposit will be submitted along with your offer on the home and can range anywhere from 1% to 5% of the home's market price. However, the exact amount you will want to provide will depend on a few factors, including:

• Market conditions (for example: a larger good faith deposit may be necessary in a seller’s market compared to a buyer’s market)
• Competing offers made by other interested buyers
• State-specific regulations

Similar to submitting an offer that is well over the asking price, larger good faith deposits can influence the odds in your favor. The good news is that your real estate agent will be able to help with a professional recommendation based on their intel on the property’s popularity.

Is a good faith deposit refundable?

Yes, it is possible to have your good faith deposit refunded. Every now and then a deal between a buyer and a seller can fall through. When this happens, your deposit is usually given to the party who is not responsible for breaking the terms of the agreement. That is why it is important to have a reputable real estate agent and lender by your side to help with the writing of the purchase agreement. They will be able to outline what needs to be written into the purchase contract in order to have the right protections and contingencies in place.

That way, if the home inspector uncovers issues with the property, or it is appraised at a lower value than the market price, your initial investment can be protected. As long as you are sure to include the correct contingency clauses in the contract, your good faith deposit will be refunded—even in the event your lender does not approve your financing.

Does a deposit go toward your down payment?

Since a good faith deposit is counted as an advance on the sale of a home, it does count toward your down payment. If you are using a VA home loan for the purchase, in which no down payment is required, then the deposit can be put toward your closing costs instead. 

Are you required to provide a good faith deposit?

While a good faith deposit is not necessarily a requirement of the homebuying process, it can significantly increase the odds of your offer being accepted by the seller, especially in a competitive homebuying market in which sellers may be receiving multiple offers from a variety of interested homebuyers.

Remember, sellers will typically want to be protected from a bad deal just as much as buyers do. And a good faith deposit can add assurance for all parties involved.

How do market shifts affect how much you should deposit?

It is worth highlighting how much market conditions can impact your good faith deposit. In a seller’s market, the seller will have more power to pick and choose from various offers made on their home due to steeper competition for less real estate. Your real estate agent may recommend that you forgo including too many contingencies in the purchase agreement or provide a larger good faith deposit in order to outbid other interested buyers.

However, in a buyer’s market, you will have more power to set the terms of the deal with the seller. In these scenarios, sellers are more eager to get their home off the market due to a decreased demand for real estate and less active buyers on the hunt for a new home.

Secure your new home with a good faith deposit

A good faith deposit can be a great negotiation tool that gets you that much closer to securing your dream home. It is important to take market conditions into consideration when you are determining exactly how much to provide. You should also discuss how you can best protect your investment, including contingencies, with your real estate agent and lender.

As you start on your journey to homeownership, it is key to remember that a good faith deposit is a great way to make a strong offer on the home you have set your sights on.