What is Good Faith Money?
Good faith money is money a buyer uses to prove to a seller that he or she intends to complete a transaction. In real estate, good faith money is also called earnest money. It is not the same as a down payment.
How Does Good Faith Money Work?
For example, let's assume John wants to buy a home listed for $500,000. To show that he is serious and ready to close the deal quickly, he provides $10,000 in good faith money. When the deal closes, the $10,000 is applied toward the sale price (meaning that John does not pay the good faith money on top of the price of the house; he simply fronts the money).
It is important to note that the buyer does not give the good faith money to the seller. The buyer gives the good faith money to a third party, such as a real estate broker, real estate attorney, escrow company or title company, and he gets a receipt. The third party should not release the good faith money to the seller until the transaction closes, meaning that if the deal falls through, John will probably get his good faith money back (though this varies by state and often depends on who cancels the deal).
Why Does Good Faith Money Matter?
Good faith money is little more than a way for a buyer to prove his or her sincerity to a seller. There is usually no set requirement on good faith money when it comes to home buying; local customs and the state of the market typically dictate the amount.