What is an earnest money deposit?

An earnest money deposit is a crucial aspect of real estate transactions, representing a sum of money that a buyer provides to a seller as a demonstration of their serious intent to move forward with purchasing a property. This deposit is typically made when the buyer submits an offer on a home and serves to reassure the seller that the buyer is committed, which can help strengthen the offer in competitive situations.

The earnest money is usually held in an escrow account until the transaction is completed. If the sale goes through, the earnest money is often applied toward the buyer's down payment or closing costs. If the transaction falls apart due to issues that are typically covered in the purchase agreement—like a failed home inspection or the buyer's inability to secure financing—the earnest money may be refundable to the buyer. However, if the buyer backs out of the deal without a valid reason, the seller may be entitled to keep the earnest money as compensation for their time and the opportunity cost of taking their property off the market.

This option captures the essential purpose of an earnest money deposit, which is to show the buyer's seriousness about the offer and provide a financial commitment that can facilitate a smoother transaction process.