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.