What Is a Good Faith Deposit for a Rental?

A good faith deposit is a sum of money provided by a prospective tenant to a landlord or property manager during the rental application process. It signals the tenant’s serious intent to rent, allowing the property to be held while the application is reviewed and assuring the landlord of genuine interest.

Defining a Good Faith Deposit

A good faith deposit, sometimes called an “earnest money deposit,” functions as a preliminary financial commitment from a prospective tenant. Its purpose is to secure a rental unit for a short period while the landlord processes the application. This payment demonstrates the tenant’s serious intent to lease, preventing the landlord from pursuing other applicants during the review.

This deposit is distinct from other rental payments like a security deposit or first month’s rent, as it’s paid before a lease is signed. It serves as a placeholder. Regulations governing good faith deposits vary by jurisdiction, so understanding the local legal framework is important for both landlords and tenants.

Handling and Application of the Deposit

Good faith deposits are commonly paid when a prospective tenant submits a rental application or shortly after viewing a property. The amount can vary, but common ranges include a few hundred dollars, a percentage of one month’s rent, or even an amount equivalent to a full month’s rent.

A written agreement or receipt is important for detailing the deposit amount, its intended purpose, and the conditions under which it may be returned or retained. If the rental application is approved and the prospective tenant proceeds to sign the lease, the good faith deposit is applied towards the first month’s rent, the security deposit, or a combination of both.

Conditions for Landlord Retention

A landlord may retain a good faith deposit under specific circumstances, such as when an approved prospective tenant chooses not to sign the lease or move forward with the agreement. This retention compensates the landlord for the period the property was held off the market, potentially causing lost opportunities with other applicants. The conditions for retention should be clearly outlined in the written good faith deposit agreement.

For retention to be valid, the landlord must fulfill their obligations, such as promptly processing the application and approving the tenant based on the stated criteria. If the tenant fails to provide necessary information to complete the application process within a specified timeframe, the deposit may also be forfeited.

Conditions for Tenant Refund

Prospective tenants are entitled to a refund of their good faith deposit under several conditions. If the landlord rejects the rental application, for reasons such as an unsatisfactory credit or background check, the deposit must be returned.

A refund is also warranted if the landlord makes significant changes to the agreed-upon lease terms after the deposit is paid, and the tenant does not accept these new terms. If the property becomes unavailable through no fault of the tenant, the deposit should be returned. The written agreement should specify the conditions and timeframe for returning the deposit.

Distinguishing from Other Rental Payments

A good faith deposit differs from a security deposit in its purpose and timing. A security deposit is collected by the landlord at or before lease signing and is held for the duration of the tenancy to cover potential damages beyond normal wear and tear or unpaid rent. It is refundable to the tenant at the end of the lease, provided the property is returned in good condition and all financial obligations are met. In contrast, a good faith deposit is a temporary payment made during the application phase to show intent.

First month’s rent is the payment for the initial period of occupancy, granting the tenant the right to reside in the property. While a good faith deposit may eventually be applied towards the first month’s rent upon lease signing, its initial purpose is to demonstrate commitment. An application fee, unlike a good faith deposit, is a non-refundable charge that covers the administrative costs of processing a rental application, such as credit and background checks. These fees are smaller, often $20 to $50 per applicant, and are distinct from the larger, potentially refundable, good faith deposit.