Good Faith Money

Good faith money (also called earnest money) is a deposit a buyer gives to a seller to demonstrate serious intent to complete a transaction. It is typically held in escrow and credited toward the purchase price at closing. Depending on the contract terms, the deposit may be refundable under specified contingencies or forfeited if the buyer backs out without a valid reason.

Key points

• Acts as a security deposit to show the buyer’s commitment.
• Usually credited toward the final purchase price.
• Often nonrefundable unless contract contingencies are met (inspection, financing, appraisal, etc.).
• Deposit size varies by market, asset type, and buyer credibility.
• Larger deposits can both qualify and motivate buyers and favor sellers in competitive markets.
• All terms should be specified in writing.

How it’s used

Sellers request good faith money to reduce the risk of losing time and opportunity to other buyers. Buyers submit the deposit with an offer; the funds are typically placed in an escrow account until closing or release under contract terms. In real estate, earnest money is common and serves to:
Signal seriousness of the offer, and
Provide the seller some compensation if the buyer breaches the contract.

Typical amounts

Deposit amounts vary widely:
* Real estate: commonly 1%–3% of the purchase price in many markets, but can be substantially higher in hot or competitive areas.
* Smaller or consumable purchases: may require a larger percentage of the total price.

Sellers in high-demand markets may require larger deposits to filter out buyers without financing and to encourage quick commitments.

Behavioral and market effects

A sizeable earnest deposit creates a sunk-cost effect: buyers are more likely to follow through to avoid losing the deposit. For sellers, larger deposits can justify higher asking prices or favor offers from buyers with stronger financial standing. For buyers, a high deposit can be a warning sign to reconsider whether the price or terms are prudent.

Contract terms and recoverability

Whether a buyer can recover earnest money depends entirely on the written agreement. Common contingencies that typically allow return of the deposit include:
* Failed home inspection
* Inability to obtain financing (if a financing contingency exists)
* Appraisal below the offer price (if an appraisal contingency exists)

Buyers should ensure the purchase agreement clearly spells out conditions for forfeiture and refund of the deposit. Sellers should document receipt and escrow arrangements.

How it differs from an option

Good faith money resembles an option in that it gives the buyer the right to proceed with a purchase, but it differs in a key way: earnest money is usually applied to the purchase price at closing, whereas an option premium is generally nonrefundable and not applied to the purchase price.

Practical tips

• Always have the escrow and deposit terms written into the purchase contract.
• Include clear contingencies (inspection, financing, appraisal) if you want the ability to recover the deposit.
• Consider market conditions when deciding how much earnest money to offer—too low may weaken your offer; too high increases risk.
• Use earnest money strategically: it can strengthen an offer in competitive markets but should be balanced against the risk of forfeiture.

Good faith money is a common transactional tool that protects sellers and signals buyer seriousness. Clear contract language and appropriate contingencies are essential to protect both parties.