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

The term "earnest money" specifically refers to the deposit made by the buyer to demonstrate serious intent to purchase a property. This deposit serves several key purposes: it shows the seller that the buyer is serious about their offer, provides some form of security to the seller, and can help facilitate the closing process. The amount of earnest money can vary but is typically a percentage of the property’s sale price.

When a buyer submits earnest money, it is usually held in escrow until the transaction is completed. If the sale goes through, the earnest money is often applied toward the down payment or closing costs. Conversely, if the deal falls through due to contingencies outlined in the contract, the buyer may be able to recover their earnest money under certain conditions, protecting both parties if the deal does not proceed.

Other options, although related to real estate transactions, do not encapsulate the specific meaning of earnest money. The fee paid to real estate agents is a commission, and title insurance costs refer to a separate financial obligation related to protecting against potential disputes over property ownership. A down payment required at closing is a separate financial commitment distinct from the earnest money deposit, as it usually occurs after negotiations and accepts the offer.