A good faith deposit is a sum of money paid to a seller or third party to secure a transaction and allow it to move forward. For certain types of contracts, a deposit may be required for the contract to become effective. In the event that the person who pays the deposit backs out or does not fulfill the deal, the recipient can retain the money as compensation.
One common situation where the good faith deposit arises is in real estate contracts, where it is known as earnest money. In these transactions, the buyer puts down a percentage of the offered price as assurance of commitment. If the deal goes through, the good faith money will be applied to the sales price. If it does not as a result of a fault of the buyer, the seller retains the deposit.
Good faith deposits are also used by underwriters for securities, such as municipal bonds and stocks. When a securities offering is prepared, underwriters are given an opportunity to bid on it. Bidders must put down money as an indicator that they are ready to complete the transaction. This ensures that companies and governments offering securities can select an underwriter in confidence.
For people involved in trading stocks and futures, a this type of deposit may be required to maintain a margin. This protects the other party to the deal from losses. In all of these situations, the deposit is a percentage of the proposed sale price. The percentage chosen varies depending on the nature of the contract and the preferences of the parties. As a general rule, there are industry standards that most people follow when determining the amount.
Good faith deposits can also be used by sellers and brokers of commodities such as crops. Potential buyers put down money that assures they will pay on delivery of the product. If there is a problem with the contract, the buyer is able to retain the deposit.
When putting down good faith money, a receipt of the deposit is provided so that in the event there is a dispute, the amount is clearly documented. People are also provided with a contract that indicates when and how the money can be retained or released. It is important to read the terms carefully to avoid surprises and to bring up any questions before signing the contract and turning over the funds.