Good faith money—also called earnest money or an earnest-money deposit—is a cash deposit a buyer gives to a seller (usually into escrow) when entering a purchase agreement to show genuine intent to complete the transaction. The deposit is generally applied to the purchase price at closing but may be forfeited if the buyer walks away in breach of the contract. It serves as protection for the seller (lost opportunity, time, and cost) and a signal of the buyer’s seriousness.
Key takeaways
– Good faith money demonstrates commitment and reduces the likelihood of a buyer backing out.
– It is typically held by an impartial third party (escrow agent or title company) until closing or termination.
– Amounts vary by asset type, market conditions, and buyer credibility—commonly 1%–3% for homes, often higher in competitive markets.
– Whether the deposit is refundable depends on the contract terms and contingencies (inspection, financing, title, etc.).
– Unlike an option premium, earnest money is usually credited toward the final purchase price.
How good faith money works
– Purpose: Compensate the seller for taking the property off the market and to filter out unserious buyers.
– Placement: Typically deposited into an escrow or trust account managed by a neutral third party (title company, real estate brokerage escrow, attorney).
– Application: At closing the deposit is credited toward buyer’s down payment or closing costs. If the buyer breaches the agreement (without an allowable contingency), the seller may keep the funds.
– Refunds: If the sale falls through under specified contingencies (e.g., failed inspection, inability to obtain financing within an agreed period, clear title issues), the buyer usually gets the deposit back.
Typical amounts and market effects
– Residential real estate: Commonly 1%–3% of purchase price, but in hot markets or high-value neighborhoods sellers may request significantly larger earnest-money deposits to strengthen offers and screen buyers.
– Smaller purchases or leases: Deposits may be a larger percentage of purchase price, similar in concept to a security deposit on rentals.
– Market dynamics: Higher required earnest money favors sellers, creates urgency, and can reduce buyers’ willingness to renegotiate. Large deposits can create sunk-cost bias—buyers are more likely to follow through once a lot of cash is at stake.
Common contingencies that protect buyers
– Home inspection contingency: Allows buyer to cancel or renegotiate if major defects are found.
– Financing contingency: Protects buyer if they cannot obtain an agreed-upon mortgage.
– Appraisal contingency: Allows renegotiation or cancellation if appraisal comes in below the agreed price.
– Title contingency: Allows cancellation for unresolved title defects.
A clearly written contract should state under which contingencies the deposit is refundable and the timeline for those contingencies.
Practical steps for buyers
1. Get prequalified or preapproved for financing before making offers. Sellers often favor buyers with proof of financing.
2. Determine an appropriate earnest-money amount:
• Standard market: 1%–3% for houses; more in competitive markets.
• Consider how much you’re willing to risk if contingencies fail.
3. Include explicit contingencies in the offer:
• Inspection, financing, appraisal, and title are standard protections.
• Specify timelines and who pays for what if repairs are required.
4. Specify escrow agent and deposit instructions in the purchase agreement: name the escrow holder, deposit deadline, and exact amount.
5. Obtain and keep written receipts showing the escrow deposit and account details.
6. Use an attorney or real estate agent to review contract language about forfeiture and refund triggers.
7. If issues arise (failed inspection or financing), act promptly and follow termination steps in the contract to preserve the right to refund the deposit.
8. At closing, confirm the earnest money is applied to purchase funds on settlement statements.
Practical steps for sellers
1. Decide upfront whether you’ll require earnest money and the minimum acceptable amount.
2. Require funds to go into neutral escrow or title company—do not accept personal checks to your account.
3. Spell out in the contract the conditions under which the deposit will be refundable and the remedies for buyer breach.
4. Keep detailed records and proof of all communications, inspections, and deadlines.
5. If you intend to keep a deposit after buyer breach, follow contract procedures and state law to avoid wrongful retention or litigation.
6. Consider back-up offers with new earnest-money deposits if initial contract terminates.
Escrow handling and documentation
– Use a licensed escrow agent, title company, or attorney to hold funds.
– Obtain a written escrow agreement that details release conditions (closing, mutual release, or court order).
– Keep all emails, inspection reports, loan commitment letters, and cancellation notices to document entitlement to return or retention of deposit.
When disputes arise
– Check the purchase contract language first—often it prescribes dispute resolution (mediation, arbitration, or litigation).
– Evidence such as inspection reports, loan denial letters, or timely notices will determine whether a buyer gets a refund.
– If unclear or contested, involve your agent, escrow holder, or attorney promptly.
Comparison with option premium
– Similarity: Both give a buyer the right to pursue a purchase.
– Difference: Earnest money is usually applied toward the purchase price at closing; an option premium is payment for the right to buy (nonrefundable and not typically credited to purchase price).
Practical examples
– Typical home: $300,000 home with 2% earnest money = $6,000 deposit. If contingencies are met and the sale closes, $6,000 reduces the buyer’s cash needed at closing.
– Hot market: Multiple bidders may offer larger earnest deposits (e.g., 5%–10%) to make offers more attractive—higher deposits increase buyer’s risk if contingencies fail.
Checklist before depositing good faith money (buyer)
– Preapproval letter from lender
– Clear escrow instructions and named escrow agent
– Written purchase agreement with spelled-out contingencies and timelines
– Proof of source of funds (some escrow/title companies require)
– Receipt or escrow confirmation showing amount and account
Legal and practical cautions
– Read the contract carefully—refund rights depend on written terms and state law.
– Large earnest-money demands can indicate market pressure; weigh risk versus strategic advantage.
– If unsure, consult a real estate attorney before signing and before forfeiting a deposit.
Sources and further reading
– Investopedia, “Good Faith Money” (earnest money overview):
– Rocket Mortgage, “Earnest Money: What Is It And How Much Is Enough?”
Disclaimer: This article is educational and not legal advice. For contract-specific questions or disputes, consult a licensed real estate attorney or your agent in your jurisdiction.