What does "earnest money" signify in a real estate transaction?

Earnest money serves as a financial commitment from the buyer, indicating their serious intention to purchase a property. By making this deposit, the buyer demonstrates to the seller that they are genuinely interested in proceeding with the transaction. This amount is typically held in trust until the sale is finalized or until a certain point in the transaction process, reinforcing the buyer’s obligations and reducing the risk for the seller.

If the transaction successfully closes, the earnest money is often applied toward the buyer's down payment or closing costs. However, if the transaction falls through due to contingencies outlined in the purchase agreement (such as failure to secure financing or issues found during inspections), the earnest money may be returned to the buyer. Conversely, if the buyer decides not to proceed without a valid reason, the earnest money could be forfeited to the seller as compensation for the disruption caused by the buyer's withdrawal. This reliance on earnest money as a sign of intent is crucial in establishing trust and clarity in real estate dealings.