One of the first steps upon entering into a real estate transaction is submitting earnest money, also referred to as a “good faith deposit.” While it’s often confused with a down payment, earnest money serves a different purpose and plays an important role in the transaction. 

What Is Earnest Money?

Earnest money is a financial deposit made by the buyer once the real estate contract or purchase agreement is signed. It signals that the buyer is committed to purchasing the property and moving forward with the sale.

How Much Earnest Money Is Required?

The amount of earnest money needed can vary depending on factors such as the property type and local regulations, but it’s typically between 1% and 3% of the purchase price.

In some instances, such as highly competitive real estate markets, buyers may offer a larger good faith deposit to help strengthen their offer.

Where Does the Money Go?

This money is held in a secure escrow account managed by a neutral third party (usually the title and escrow company) until closing. This ensures the funds are: 

• Not released prematurely
• Held until all conditions of the real estate contract are met
• Distributed according to the contract terms

What Happens to the Earnest Money at Closing?

During the closing process, the earnest money deposit is typically applied toward the buyer’s down payment or closing costs. It makes up a portion of the overall funds the buyer will need to submit to purchase the property.

Is It Possible to Lose Your Good Faith Deposit?

Yes, it is possible to lose or have to forfeit a good faith deposit in some instances, such as under certain contingencies. A contingency is a condition of the real estate deal that must be met for the transaction to move forward. Common contingencies in real estate sales include:

• Financing/loan approval
• Home appraisal
• Home inspection

If a buyer cancels the contract for a reason covered by a contingency, and it’s within a specified period of time, they can typically receive their earnest money back. However, if a buyer backs out of the deal without a valid reason, the seller may be entitled to keep the deposit.

What Happens If the Transaction Falls Through?
If the real estate deal does not end up proceeding to closing, the good faith deposit will be distributed based on the terms of the purchase agreement. In many cases, the buyer may receive a refund if contingencies are met, while the seller may receive the funds if the buyer defaults on their contractual obligations. 

The title and escrow company holding the funds will generally ensure the process is handled properly, according to local regulations, and that the funds are distributed according to the contract terms.

Why Earnest Money Matters

Earnest money, or a good faith deposit, is a small but important part of the real estate transaction, helping to create accountability on both sides of the deal. It demonstrates to the seller that the buyer is serious about buying the property. It can also allow the buyer to appear more competitive, often strengthening their offer to purchase. 

To learn more about earnest money, how it’s held and managed securely, or the distribution process, contact the team at Linear Title & Escrow.