Good-Faith Deposit

What a good-faith deposit is

A good-faith deposit is money paid at the start of a deal to show that a party means to see it through. It does two jobs. It gives the other side some protection if you walk away, and it pays for early work that has a real cost whether or not the deal closes.

In commercial real estate the phrase covers two different payments, and mixing them up is easy to do:

• Buyer's earnest money. Paid by the buyer to the seller's side under the purchase contract, normally held by an escrow or title company, and credited to the purchase price at closing.
• Borrower's deposit to a lender. Paid by the borrower to the lender to begin underwriting and to fund third-party reports, usually after a term sheet and often alongside a signed commitment letter.

Different parties hold the money, different documents govern it, and the refund rules do not match. A buyer can lose earnest money to a seller while the lender's deposit is handled entirely separately.

Buyer's earnest money

The purchase contract, not the loan, creates this deposit. It usually follows a letter of intent in which buyer and seller agree on price, deposit and a due diligence period. The contract then states:

• The amount and the due date. The contract sets the due date, often within a few business days of signing, and the funds are wired to the escrow holder.
• The due diligence period. A window in which the buyer can inspect the property, review leases and financials, and terminate with the deposit returned.
• The contingencies. Financing, appraisal, title and environmental contingencies that let the buyer terminate and recover the deposit if a stated condition fails.
• What happens on default. Many commercial contracts say the seller keeps the deposit as liquidated damages if the buyer breaches.

The key date is when the deposit becomes "hard" or non-refundable. Before it, the buyer can usually terminate and recover the money. After it, the buyer typically recovers it only if a contingency that is still alive fails or the seller defaults. Contracts with staged deposits add more money at that date.

Liquidated damages are not unlimited

When a contract fixes the seller's remedy as the deposit, courts generally enforce the clause only if the amount is reasonable in light of the anticipated or actual loss and the difficulty of proving that loss, and not a penalty. This is the general rule in Restatement (Second) of Contracts § 356, which states apply with their own variations. Whether a particular deposit is enforceable depends on your state's law and the contract's wording, which is a question for your attorney.

The borrower's deposit to the lender

A commercial lender spends real money before it knows whether a loan will close: an appraisal, an environmental site assessment, a property condition report, legal fees and sometimes a survey or zoning report. A lender deposit funds that work so the lender is not out of pocket if the borrower disappears.

It goes by several names: application deposit, underwriting deposit, good-faith deposit, or a retainer for third-party costs. Read the document to see what it actually is. Two features vary from lender to lender:

• Whether it is a fee or an advance. A non-refundable application fee is a cost of doing business. A deposit against actual third-party costs should be accounted for, with unspent funds returned or credited.
• When it is due. Some lenders collect it with the application, some after a term sheet, and some only with the commitment letter. Paying for reports before the lender has issued a term sheet leaves you carrying the cost if the lender declines.

The deposit is different from the origination fee, which pays the lender for making the loan and is generally charged at closing. If a lender wants a large non-refundable amount up front, ask whether it is a deposit toward costs or an early fee, and whether it will reduce the origination fee at closing.

Worked example

You contract to buy a $2,000,000 office building with a $1,400,000 loan (70% loan-to-value), which leaves a $600,000 down payment. The numbers below are illustrative, not typical.

Item	Amount	Paid to
Purchase price	$2,000,000
Loan amount	$1,400,000
Required down payment ($2,000,000 − $1,400,000)	$600,000
Earnest money paid after signing	$50,000	Escrow holder
Lender deposit for reports and legal work	$15,000	Lender
Down payment still due at closing ($600,000 − $50,000 earnest money)	$550,000	Escrow holder

The earnest money counts toward the $600,000 down payment because it is credited to the price at closing. The $15,000 lender deposit does not reduce the down payment. It is applied to the lender's costs, and if there is a balance the commitment letter should say whether it is refunded or credited against closing costs. Treat the lender deposit as an extra cash need beyond the down payment, and ask for a statement of what was spent.

Now suppose the appraisal comes in low and the lender cuts the loan to $1,200,000. The down payment needed rises to $800,000. If your purchase contract has a financing or appraisal contingency that is still open, you may be able to terminate and recover the $50,000 earnest money. If the contingency deadline passed, the seller may be entitled to keep it. Meanwhile, the lender's appraisal cost is already spent from your $15,000.

Good-faith deposit vs. related terms

• vs. down payment. The down payment is your equity in the property at closing. Earnest money is credited toward it; a lender deposit is not.
• vs. commitment fee. A commitment fee is paid when you accept the commitment letter, and the letter says whether it is refundable or credited. Some lenders use the same word for both.
• vs. origination fee. Charged for making the loan, usually at closing. See origination fee.
• vs. escrow reserves. Funds the lender holds for taxes, insurance and repairs over the life of the loan. See escrow and impounds.

How lenders use the deposit

A lender's deposit lets it order reports without carrying the cost if the deal does not close. Lenders and escrow holders may also ask where deposit funds came from, so keep the bank records for any money you wire.

What to watch for and how to negotiate

• Match the contract deadlines to the loan timeline. If the earnest money goes hard in 30 days but your lender needs 30–90 days, extend the contingency period or negotiate a staged deposit. SBA 7(a) loans take 30–60 days and SBA 504 loans 60–90 days from complete application to closing, and bridge, bank and CMBS loans vary; see bridge loans if speed is the constraint.
• Keep a financing contingency. Without one, a loan denial or a low appraisal can put the deposit at risk. If a seller refuses, treat the deposit as being at risk from the first day.
• Ask for an itemized budget. Which reports, estimated cost, and who the vendor is. You are paying for these reports; ask for copies.
• Get refund and credit terms in writing. Is any unspent amount returned? Is any part credited at closing? What if the lender withdraws or changes the terms?
• Pay the escrow holder, not the other side. Earnest money should go to a neutral escrow or title company under the contract. Confirm wire instructions by phone, using a number you already trust, before sending funds.
• Be cautious about paying for reports before a term sheet. A term sheet is not a binding commitment, but it shows the lender has looked at the deal and priced it. See term sheet.
• Compare lenders on total up-front cost. Fees at application, at commitment and at closing add up, so compare all three, not just the rate. Our guide to brokers vs. banks covers how fees differ by channel.

Do federal rules apply?

For most commercial borrowers, no. Regulation Z, the Truth in Lending rule, does not apply to credit extended primarily for a business, commercial or agricultural purpose, or to credit extended to anyone other than a natural person (12 CFR 1026.3(a)). The RESPA coverage rule also excludes business-purpose loans (12 CFR 1024.5(b)(2)). The consumer loan-estimate forms and their fee tolerances therefore do not apply to a commercial deposit, and the lender's letter, the purchase contract and state law decide. That makes the written terms your main protection. State law also governs how earnest money must be held and released, which is why an attorney in the property's state should read the contract. For state-specific closing costs, see our state guides.

Before you pay anything

1. Confirm who is asking for the money and which document creates the obligation.
2. Find the refund conditions and the date the money becomes non-refundable.
3. Line up that date with the lender's realistic closing timeline.
4. Ask what the lender deposit covers, who the vendors are, and what is returned if the deal ends.
5. Have counsel read the purchase contract and the lender's letter. Our guide to buying a commercial building walks through the sequence.

When you are ready to see what a lender would ask for on your deal, start with the application. Lender deposits and fees are set by each lender, so ask for them in writing before you commit funds.

Sources: 12 CFR § 1026.3(a) (Regulation Z, exempt transactions), law.cornell.edu/cfr/text/12/1026.3; 12 CFR § 1024.5 (RESPA coverage), consumerfinance.gov; Restatement (Second) of Contracts § 356 (liquidated damages). Purchase contract and lender terms vary; the figures in the worked example are illustrative.