What is earnest money in a real estate transaction?

Earnest money is a deposit made by the buyer to demonstrate their seriousness about purchasing a property. This payment shows the seller that the buyer is committed to moving forward with the transaction. It helps to secure the property while the buyer obtains financing and completes due diligence, such as inspections and appraisals. If the sale goes through, the earnest money is typically applied toward the buyer's closing costs or down payment. If the transaction falls through due to contingencies specified in the purchase agreement, the earnest money may be refunded to the buyer; however, if the buyer backs out without a valid reason, the seller may keep the earnest money as compensation for taking the property off the market.

This understanding emphasizes the importance of earnest money in real estate transactions, as it reflects the buyer's intention and can impact negotiations and the overall process of buying a home.