Understanding Good Faith Money
Good faith money, sometimes referred to as earnest money, is a critical component in real estate transactions. It serves as a deposit made by the buyer to reflect their genuine intent to purchase the property. This deposit is typically held in an escrow account until the transaction is either finalized or terminated. The primary purpose of good faith money is to provide assurance to sellers that the buyer is earnest about completing the deal.
Key Characteristics
- Amount: The amount can vary but is typically between 1% to 3% of the purchase price.
- Escrow: The deposit is usually held in an escrow account managed by a neutral third party.
- Refund Conditions: It is often refundable, depending on the contingencies laid out in the purchase agreement, such as failed inspections or financing issues.
- Application:
- Credit Towards Purchase: If the deal closes, the good faith money is applied towards the buyer’s down payment or closing costs.
- Forfeit: If the buyer backs out without a valid reason, they might forfeit the deposit to the seller.
Examples
- Example 1: A buyer provides $5,000 in earnest money on a $250,000 home. If the transaction is completed, the $5,000 will be credited toward their down payment.
- Example 2: A buyer places a $10,000 deposit for a $400,000 property. If the deal falls through due to failure in the home inspection contingency, the buyer might receive a full refund of the good faith money.
Frequently Asked Questions
What happens to the good faith money if the deal falls through?
If the deal falls through based on contingencies specified in the purchase agreement (like a failed home inspection or issues with financing), the buyer may be entitled to a refund. However, if the buyer decides to back out without a valid reason, they may forfeit the deposit to the seller.
Is good faith money mandatory in real estate transactions?
While not legally mandatory, good faith money is a common practice in real estate transactions. It helps solidify the buyer’s intent and provides the seller with some assurance that the buyer is serious about the purchase.
How much should be offered as good faith money?
The amount varies, typically ranging from 1% to 3% of the home’s purchase price. In competitive markets, offering a higher amount might strengthen your bid.
Is good faith money the same as a down payment?
No, they are not the same. Good faith money is a deposit showing the buyer’s intent to purchase, while the down payment is a portion of the home’s purchase price paid upfront at closing. The good faith money can be applied towards the down payment.
Who holds the good faith money?
The good faith money is usually held in an escrow account by a third party, such as a real estate brokerage, escrow company, or attorney, until the transaction closes or terminates.
Related Terms
Earnest Money
Earnest money refers to a deposit made by the buyer to show his or her commitment to the purchase of a property.
Escrow Account
An escrow account is a neutral, third-party account used to hold funds, such as good faith money, until the completion of a transaction.
Contingencies
Contingencies are specific conditions or criteria outlined in a purchase agreement that must be met for the sale to proceed to closing.
Purchase Agreement
A legal document outlining the terms and conditions of a real estate transaction, including the amount of good faith money required.
Online Resources
- National Association of Realtors
- Real Estate Buyer’s Council (REBAC)
- U.S. Department of Housing and Urban Development (HUD)
- Real Estate Investment Network
References
- “Your First Home: The Proven Path to Home Ownership” by Gary Keller
- “Real Estate Investing for Dummies” by Eric Tyson, Robert S. Griswold
- “The Home Buying Kit for Dummies” by Eric Tyson, Ray Brown
Suggested Books for Further Study
- “The Book on Rental Property Investing” by Brandon Turner
- “Real Estate Investing 101” by Michele Cagan
- “Real Estate Financing: Theory and Practice” by Terrence M. Clauretie, G. Stacy Sirmans
