What is a “good faith deposit” in real estate transactions?

A good faith deposit, also known as earnest money, is a sum of money that a buyer provides to demonstrate their serious intent to purchase a property. This deposit is typically held in escrow and serves as a financial commitment that shows the seller the buyer is earnest in following through with the transaction. The amount of this deposit can vary but is generally a small percentage of the purchase price, reinforcing the buyer's readiness and willingness to complete the sale.

If the sale proceeds, the good faith deposit is usually applied toward the buyer's down payment or closing costs. Should the buyer back out of the transaction without a valid reason hinted at in the sales contract, the seller may retain the deposit as compensation for the time and opportunity lost.

This practice helps to provide a level of security to both parties in the transaction—a commitment from the buyer, and assurance to the seller that the buyer is serious about completing the purchase.