What does "earnest money" signify in real estate?

"Earnest money" is fundamentally a deposit made by a buyer to demonstrate serious intent to purchase a property. It serves as a form of security for the seller by showing that the buyer is committed to the transaction. This deposit is typically held in an escrow account until the transaction is completed and can be applied to the purchase price, closing costs, or refunded if the deal falls through under the agreed-upon contingencies.

The concept of earnest money is critical in the real estate process as it helps to reassure the seller that the buyer is genuine in their intent. Without this level of assurance, sellers may hesitate to take their property off the market or negotiate further with a potential buyer.

Other options may confuse or misrepresent the nature of earnest money. For instance, a fee paid for property appraisals is related to the overall buying process but does not relate to earnest money itself. While an amount paid to the seller as a sign of good faith can resemble the function of earnest money, it does not capture the intent or mechanism of the deposit. Finally, the total cost involved in financing a property does not pertain to earnest money at all, as financing refers to the mortgage or loan tools used to purchase the property.

Understanding the role of earnest money