Money a borrower posts when accepting a term sheet or commitment, used to fund third-party reports and legal costs and generally at risk if the borrower walks away.
The longer version
The deposit covers the lender's out-of-pocket spend on appraisals, environmental and property condition reports, and counsel, which begin before there is any certainty the loan will close. Unspent amounts are typically credited at closing or returned if the lender declines.
The friction is over what happens if the borrower withdraws. Commitment letters usually let the lender retain the deposit to the extent of costs incurred, and sometimes in full as a break fee. Borrowers negotiate for an accounting of actual costs, which is worth settling in the commitment rather than after a deal dies.
Common questions
- Is a good faith deposit refundable?
- Partly. Amounts spent on third-party reports and legal fees are generally not returned. The unspent balance is usually credited at closing or refunded if the lender declines to proceed.
- How large is a typical deposit?
- It is sized to expected third-party and legal costs rather than as a percentage of the loan, so it varies with the complexity of the property and the number of reports required.
- Who holds the deposit?
- The lender, applying it against costs as they are incurred. Borrowers often ask for an itemized accounting, which is easier to provide if invoices are filed against the deal from the start.