What is earnest money?

Earnest money is a portion of the home price that demonstrates a buyer's serious intent to purchase property. It serves as a financial commitment that shows the seller that the buyer is not just casually looking, but is genuinely interested in completing the transaction. Typically paid at the time an offer is made, this amount is held in escrow until the transaction is finalized, at which point it is usually applied to the down payment or closing costs.

This practice is crucial in real estate transactions as it helps secure the buyer's position while also giving the seller assurance that the buyer is invested in the deal. If the buyer were to back out of the purchase without valid reasons outlined in the contract, the seller may have the right to keep the earnest money as compensation for the lost time and potential opportunities with other buyers.

Other options, while related to real estate, do not accurately capture the essence of earnest money. A fee paid to the real estate agent is generally considered a commission and not related to earnest money. A type of mortgage point refers to fees paid to lower interest rates on a mortgage and does not involve the buyer's initial commitment. Lastly, a deposit for rental agreements pertains to rental transactions, which is distinct from the process of purchasing property.