An earnest money deposit is a specified amount of money that is applied to a specific transaction as a show of good faith on the part of the buyer. The term is commonly employed in real estate deals, in which a prospective buyer makes this type of deposit as a demonstration of his or her serious desire to follow through with the transaction to completion. Along with real estate deals, an earnest money deposit may be utilized in the purchase of equipment or supplies from a vendor, or even in transactions involving the purchase of furniture or other household items.
The concept of an earnest money deposit involves the willingness of a buyer to convey to a seller a real intent to make a purchase. Earnest money may be offered in many different types of transactions, including personal ones. For example, an individual who is purchasing a used vehicle from the owner may offer earnest money to effectively lock in the car from purchase by someone else. This approach allows the buyer to motivate the seller to hold the vehicle for an agreed period of time, during which the buyer will secure the remainder of the funds needed to complete the transaction.
This same general approach applies in real estate deals in which a good faith or earnest money deposit is offered and accepted. Buyers make the deposit in order to prevent anyone else from buying the home for a short period of time while they arrange the financing or otherwise secure the assets needed to pay the full purchase price, plus closing and other related costs. Should the buyer be unable to secure the funds necessary to complete the transaction, the good faith deposit is often forfeited as part of the deal. In this instance, the forfeiture of the deposit is seen as a way to compensate the owner of the property for the time spent holding the property and the possible loss of a sale in the interim.
Before extending an earnest money deposit in any type of financial transaction, it is important to understand how much of a deposit is required, and the laws and regulations that apply to deposits of this type in the area and setting in which the deposit is made. Some local and national governments impose limits on the amount that a seller can ask as a show of good faith, while also limiting the amount of time that the seller must wait before considering the deposit to be forfeited and is free to offer an asset for sale to other buyers. Understanding the terms and conditions that apply will make it easier to determine when offering a good faith deposit is a good idea, and when it would be better to pass on the current offer and look for another opportunity.
