What is "earnest money"?

Earnest money refers to a deposit made by a buyer to demonstrate their good faith in proceeding with the purchase of a property. This sum of money serves as a serious commitment and is typically held in trust until the completion of the transaction. The purpose of earnest money is to assure the seller that the buyer is sincere and willing to proceed with the sale. If the transaction goes ahead as planned, the earnest money is often applied to the buyer's closing costs or down payment.

If the deal falls through due to the buyer's fault, the seller may keep the earnest money as compensation for taking the property off the market. Conversely, if the seller fails to uphold their end of the agreement, the buyer may be entitled to a full refund of the earnest money. This practice helps establish trust between both parties during negotiations and can be a key factor in competitive real estate markets where multiple offers may be present.