What is earnest money?

Earnest money is a deposit made by a buyer to demonstrate serious intent to purchase a property. This amount is typically submitted along with the offer to purchase as a sign of good faith, showing the seller that the buyer is committed to the transaction. The earnest money may be held in an escrow account and can be applied toward the buyer's closing costs or down payment at the time of closing.

This practice is important in real estate transactions as it helps both parties gauge the commitment level of the buyer. If the transaction proceeds successfully, the earnest money is often credited towards the total purchase price. Conversely, if the buyer backs out of the deal without just cause, there could be consequences, including the forfeiture of the earnest money to the seller. This mechanism helps protect sellers from tire-kickers and assures them that the buyer is genuinely interested in following through with the purchase.

Understanding earnest money is vital for anyone involved in real estate transactions, as it establishes a level of trust and seriousness between buyers and sellers.