Good faith deposits, also called earnest money deposits, are an important part of buying a home. In some states, a good faith deposit is required, although the amount is not specified. It is always a good idea to check state laws for rules on earnest money, or ask your realtor.
The earnest money that is required will vary according to local custom, but also can change according to the marketplace. If real estate in the area is selling quickly, the seller may require a larger good faith deposit.
A good faith deposit is nothing more than amount of money that indicates your seriousness in buying the property. When a purchase contract is drafted, the contract should specify the amount required to secure it. A good faith deposit is not a down payment, and should not be confused as such. A down payment should be much more than the earnest money.
Your realtor should be able to tell you how much earnest money will be required. In California, where a good faith deposit is required, it is normally between 1 and 3 percent. Earnest money that is more than 3 percent is also rare, because the state limits the damages for default to that amount.
If a buyer has financed the entire cost of the property, the good faith deposit is often refunded to cover closing costs. If the property is only financed partially, the good faith deposit becomes part of the down payment amount.
Once you have arrived at the amount required for your good faith deposit, stop before writing the check. You should only give earnest money to a third party that is reputable. These include legal firms, escrow services, title companies, or brokerages.
People in the past have been duped into giving the money to the seller or a broker that leaves with the money. Check to make sure that there have been no complaints against the firm you are trusting with your money.
Even with a reputable firm, make sure to get a receipt and ensure that the funds are kept in a third party account. It is a common business practice not to release the funds until the transaction is completed. Insist upon this precaution for your own financial safety.
Sometimes if a contract is cancelled your earnest money can be refunded. Some states have specific laws that specify when good faith deposits should be returned. If you meet the requirements to have your good faith deposit returned and the seller refuses, the seller could face a penalty.
Often such specifics will be outlined in your contract. If the contract does not outline the terms of your good faith deposit, guidelines should be outlined by state laws. An attorney should be able to advise you of your rights.
If the cancellation of the contract occurs a mutual agreement for the release of the good faith deposit should be signed. If the break in the contract is acrimonious, the seller may refuse to return the money. If an agreement cannot be reached, the state may take possession of the money in escrow. This encourages a speedy resolve of earnest money disagreements.
Understanding conventions and state laws that govern earnest money is a worthwhile pursuit. Consult an attorney while reviewing the contract for advice about your good faith deposit and possible problems. With the proper care a good faith deposit should simply be one more step towards the purchase of your new property.
