What does earnest money signify in a real estate transaction?

Earnest money is a deposit made by a buyer to demonstrate their commitment and seriousness about purchasing a property. By providing earnest money, the buyer shows the seller that they are genuinely interested in the transaction, which can help to differentiate them from other potential buyers who may not have made such a commitment. This deposit is typically held in an escrow account and serves as a sign of good faith.

If the transaction proceeds to closing, the earnest money is often applied towards the buyer's down payment or closing costs. However, should the deal fall through due to contingencies outlined in the contract, the buyer may receive their earnest money back. If the buyer defaults without a legitimate reason, the seller may retain the earnest money as compensation for taking the property off the market.

This practice is common in real estate transactions as it helps to establish trust and provides security to both parties involved.