What does the term "earnest money" in a real estate transaction refer to?

In a real estate transaction, "earnest money" refers to a deposit made by the buyer to demonstrate their serious intent to purchase the property. This deposit serves as a sign of good faith and commitment, indicating that the buyer is earnest about moving forward with the transaction. If the sale proceeds, the earnest money is typically applied toward the down payment or closing costs.

When a buyer provides earnest money, it reassures the seller that the buyer is genuinely interested and is less likely to back out of the deal without valid reasons. If the transaction falls through due to the seller's fault or specific contingencies outlined in the purchase agreement, the earnest money is usually refundable to the buyer. Conversely, if the buyer withdraws without a legitimate reason, the seller may be entitled to keep the earnest money as compensation for taking the property off the market.

This understanding of earnest money underscores its role as a crucial element in real estate negotiations, aiding in establishing trust between buyer and seller.