Everything You Need to Know About the Holding Deposit

When you decide to rent an apartment, there is a good amount of expenses to keep in mind. From an actual rent for the next month to a security deposit to an application fee — all this quickly adds up. And you might also find out that your potential landlord requires you to pay a holding deposit.

Is it legal for a landlord to require a holding deposit? How much can they ask for? Finally, what exactly a holding deposit is? You can find answers to all these questions and much more in the following article.

What Is a Holding Deposit?

Let’s begin with the definition of the concept. A holding deposit, also called a good faith deposit or an application deposit is a certain sum the landlord can ask you to pay around the time you apply for the apartment to assure you’re serious about this property. Generally, it is done when you have already agreed on renting but did not sign the written agreement yet. For example, if a landlord still needs to run tenant screening, if a tenant cannot pay in full the first-month rent and security deposit.

In these cases, a holding deposit serves as a guarantee for both parties — the landlord can be sure that they will not lose money if the potential tenant decides to keep looking for a better place. At the same time, the renter doesn’t have to worry that the property will be rented out to someone else while they are waiting for their paycheck. 

Note: Before paying a holding deposit to your potential property manager, make sure to check tenant-landlord laws in your state regarding this issue. There, you can double-check the specific requirements for holding deposits, if the landlord is permitted to keep an application deposit, and under which conditions.

How Much Is an Application Deposit?

There is no set rule on how much an application deposit can be, only that it should be “reasonable.” It should not exceed the security deposit amount, but usually is lower than that and equals a few hundred dollars. Overall, as it is used to protect the landlord against expenses if the potential renter decides to pull out of the deal, it should correspond with these expenses. They could include extra advertising or financial losses as the property stayed vacant for longer. Consequently, the landlord can calculate prorated rent and subtract costs from the holding deposit.

To avoid any possible disputes, make sure to receive written confirmation of paying a holding deposit to your potential landlord. Ideally, it should include not only the amount you’ve paid but also the conditions under which the holding deposit will be returned to you or can be kept by the landlord. In some states, it is a legal requirement to issue a written statement of all terms if the application deposit comes into play.

Difference Between a Holding Deposit and a Security Deposit

There are a few main differences when we talk about an application deposit vs. a security deposit. The landlord requires a security deposit when the parties sign the lease and retains it until the tenant moves out. It serves to protect the landlord against losses at the end of the tenancy if the renter owes rent or causes damages beyond wear and tear. Usually, the security deposit amount is between one or two months’ rent — depending on your state laws and landlord’s preferences.

On the other hand, a holding deposit can only be used until you sign a lease — as a guarantee that you will not change your mind. It is handed over to the landlord when you’re applying for a rental or shortly after. And when you officially sign the lease, it is transferred towards the first month’s rent or the security deposit.

Note: This article covers all questions you might have about the security deposit.

Difference Between a Holding Deposit and an Application Fee

Similarly, an application fee is an entirely different concept that cannot be used interchangeably with a holding deposit. The application fee is required by the landlord to cover the costs of processing the tenant’s application. That usually includes paying for a credit check and background check. In most cases, the application fee is lower than the holding deposit — between $20 and $100, depending on your state laws and a particular rental unit/landlord.

Applying for a rental, you can expect to pay an application fee almost every time when the holding deposit is much less common among the landlords and property managers. 

Is It Legal to Charge an Application Deposit?

Usually, it is legally allowed for your future landlord to charge an application deposit, as long as it does not go against any state laws. For example, in the state of New York, all the rental fees that can be charged upfront are capped. Overall, your landlord cannot charge you more than $20 for an application fee, plus the security deposit that cannot exceed one month’s rent and the first month’s rent. Any other charges that your potential landlord might ask you to pay extra are illegal.

So, what about the holding deposit? 

In this case, the landlord could ask you for a certain amount of the holding deposit that would go towards the security deposit or rent on the day you sign the rental agreement. 

Is a Holding Deposit Refundable?

As with many things in the rental industry, the answer is — it depends. There are a few possible scenarios to consider, so let’s start with the easiest one.

The tenant and landlord sign the lease agreement

As mentioned earlier, in this situation, the application deposit will most likely be transferred towards the security deposit or the first month’s rent. Of course, you can ask your property manager to return the holding deposit and pay them the security deposit and rent in full.

The tenant decides to withdraw their application

From the landlord’s perspective, this scenario is the very reason to require the holding deposit. If you change your mind and decide to rent a different apartment, a property manager can keep a holding deposit or its part to cover their expenses.

The landlord decides to proceed with another renter

Sometimes, tenants give the holding deposit before the property manager runs background and credit checks on them. And, the landlord might choose to opt out after the tenant screening and look for another renter. If the apartment is not rented out to the potential tenant because of the landlord’s decision, they must return the application deposit in full.

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While it’s pretty uncommon for the landlords to ask for the holding deposit, you should know the basics of this concept. Our last piece of advice? Make sure to arm yourself with the knowledge of the renters rights in your state, and don’t pay in cash without receiving written confirmation of the payment. Hopefully, this will prevent you from any troubles!