What is earnest money in a real estate transaction?

Earnest money is a deposit made by a buyer to demonstrate their serious intent to purchase a property. This sum of money serves to bind the offer and shows good faith in the transaction. When a buyer submits an offer on a property, including earnest money can reassure the seller that the buyer is committed to proceeding with the purchase, which can be pivotal in competitive markets.

If the transaction moves forward to closing, the earnest money is typically applied toward the buyer’s down payment or closing costs. If the buyer backs out without a valid reason outlined in the contract, the seller may have the right to retain the earnest money as compensation for taking the property off the market.

In contrast, the other options do not accurately reflect the function of earnest money. Fees for inspections are typically separate costs incurred during the due diligence period, commissions are payments to real estate agents based on the transaction commission structure, and a loan for purchase refers to funds borrowed to finance the home acquisition rather than a deposit indicating buyer intention.