What Is 'Good Faith Money'

Good faith money is a deposit of money into an account by a buyer to show that he or she has the intention of completing a deal.

BREAKING DOWN 'Good Faith Money'

In most cases, the deposit amount will be a percentage of the total amount owed. A common example of good faith money is the so-called "earnest money" escrow deposit required by most home sellers to enter into a sales contract with a buyer.

The amount of good faith money used to initiate a contract with a seller will vary considerably depending on the asset, the local market, and the credibility of the buyer. For example, when the housing market in the U.S. is very hot, the expected earnest money deposit, in some areas, can rise to 5-10% of the potential purchase price of the home. 

Most good faith money deposits are part of an agreement that spells out the conditions under which a buyer may lose their deposit if they are unable or unwilling to complete the contract. A good faith deposit may seem a little like a call option because the buyer has the right to complete the ultimate purchase. However, unlike an option, good faith money is usually applied to the final purchase price, while a call option premium is not.

 

RELATED TERMS
  1. Earnest Money

    Earnest money is a deposit made to a seller, often in real estate ...
  2. Doctrine Of Utmost Good Faith

    The Doctrine of Utmost Good Faith is the minimum standard requiring ...
  3. Term Deposit

    A term deposit is a deposit held at a financial institution that ...
  4. Brokered Deposit

    A brokered deposit is a deposit to a bank that is placed by a ...
  5. Deposit Interest Rate

    The deposit interest rate is the interest rate paid to deposit ...
  6. Demand Deposit

    A demand deposit is funds held in an account which deposited ...
Related Articles
  1. Personal Finance

    Where to Put Your Cash: Call Deposit vs. Time Deposit Accounts

    Time deposit accounts and call deposit accounts allow customers to earn higher interest in exchange for less access to their cash.
  2. Investing

    Rent-to-Own Homes: How the Process Works

    A rent-to-own agreement, also called a lease option or lease-to-own agreement, offers an alternative way to buy a home.
  3. Investing

    10 Hurdles to Closing on a New Home

    A home will probably be the biggest purchase of your life - find out what can go wrong before you even close the deal.
  4. Investing

    The Ins And Outs of Seller-Financed Real Estate Deals

    There's more than one way to buy or sell a house. Seller financing presents yet another unique option.
  5. Investing

    How to Trade Futures Contracts

    Futures is short for Futures Contracts, which are contracts between a buyer and seller of an asset who agree to exchange goods and money at a future date, but at a price and quantity determined ...
  6. Investing

    Contingency Clauses In Home Purchase Contracts

    Here, we introduce widely used contingency clauses in home purchase contracts and how they can benefit both Buyers and Sellers.
  7. Insights

    What is Money?

    Money: It's a part of everyone's life, and we all want it, but what is it, how does it gain value, and how it was created?
RELATED FAQS
  1. What determines the interest rate on my money market account?

    Placing funds in a money market account may provide a higher interest rate than a savings account due to the underlying securities ... Read Answer >>
  2. How liquid are money market accounts?

    Understand the characteristics that distinguish money market accounts from checking, savings account and money market funds ... Read Answer >>
  3. What is the difference between the deposit multiplier and the money multiplier?

    Explore the deposit multiplier and the money multiplier, two fundamental concepts of Keynesian economics, and learn how they ... Read Answer >>
  4. What happens when M2 money supply grows faster than the overall economy?

    Find out what happens if the total supply of money and money substitutes expands at a faster rate than the productive output ... Read Answer >>
Trading Center