Good Faith Deposits
During the process of purchasing a home, you will most likely be asked to make what is called a good faith deposit or earnest money deposit. A good faith deposit lets the buyer know that you are serious and that you intend to fulfill the terms of their agreement. It is important to keep in mind that these deposits however should not to be confused with a down payment.
How much do you need to deposit?
Many different factors will affect the amount of money that is required for the deposit. If a property generates a lot of interest, a buyer may make a larger deposit to convince the seller that their offer is stronger than the others. Typically the amount requested is anywhere from 1 to 3 percent of the sales price but, there is no set requirement. Generally the larger the deposit the more the seller will take your offer seriously.
Who holds the money?
Once the buyer and seller agree to the amount of the good faith deposit, the money should be deposited with a third party and held “in trust.” Potential third parties include escrow and title insurance companies as well as an attorney if your state requires their involvement or you choose to use one. Never give an earnest money deposit to the seller. Be sure to verify that the third party will deposit the funds into a separately maintained trust account and always obtain a receipt.
Is the money refundable?
If the buyer and the seller cannot come to terms on the sale then the money will be refunded. It is always a good idea to consult a real estate attorney who can help ensure that your offer is written in a manner that protects your rights to the deposit. Always review your purchase agreement as well as to the specifics of the refund of the deposit. Often, third party fees are also paid out of earnest money deposits. For example, if an appraisal has been completed on the property then the appraisal fee is going to have to be paid before money can be released to either of the parties.
The basic idea of a good faith deposit is be an type of insurance for the seller. It is important to remember that the escrow process can take 30 to 60 days, and during that time their property is off the market. The good faith deposit essentially compensates the seller for this time in the event the buyer is unable to follow through on the purchase of the property. This deposit helps reassure the seller you are serious about buying their home.
