If you are a first-time homebuyer it is easy to get overwhelmed with all lingo and unfamiliar terms that get thrown around during the home buying process. A term that may not be familiar to first time homebuyers is: earnest money, escrow or good faith deposits.
When you purchase a home, part of the offer will include a good faith deposit. This is to show that you are a ready, willing and able buyer. There are a lot of different strategies and even different “customary” approaches as to what to put down as a good faith deposit. Sellers tend to want larger deposits as they fear if a buyer only has $250 or $500 in the game it is easier for them to walk away. As a buyer, if you are up against several other buyers you might want to consider putting down a larger deposit; also if you are making a low offer, a larger deposit might make the seller more likely to work with you. Have a discussion with your agent to come up with a reasonable good faith deposit based on your situation. The agent will take into account the type of loan you are getting, the price point of the purchase and even the type of property. Also keep in mind that the seller can counter the amount of the deposit as well as any other terms of the offer.
As a side note if you are planning on purchasing a home and you are obtaining a mortgage keep in mind that your good faith deposit can’t be cash. Lenders need a paper trail of the money. They want to see it come out of your checking account and successfully clear. A cash deposit does not provide a paper trail.
Where does the deposit go? In our area the good faith deposit typically goes into the escrow account of the brokerage that wrote the offer. It goes into a non-interest bearing account where it remains until closing at which time it will go toward the purchase price and is reflected in the closing statement.
What happens if the transaction doesn’t close? If the deal falls apart and the buyers and the sellers agree, a release is written and signed by both parties and the deposit will go to the party specified in the release. What happens if the deal falls apart and the buyer and seller don’t agree? That is where it can get sticky! The real estate broker can’t release the deposit to either party without both parties being in agreement. If both parties don’t agree and won’t sign a release, the deposit stays in escrow until there is a meeting of the minds. This is not what anyone wants. It is disappointing for all concerned when a transaction fails to progress toward closing but working together to come up with a solution agreeable to all is the best course of action.