What is earnest money in a real estate transaction?

Earnest money is a deposit made by a buyer in a real estate transaction to show their serious intent to purchase a property. This financial commitment signals to the seller that the buyer is genuinely interested in the property and intends to proceed with the transaction. The earnest money is typically held in an escrow account and serves as a good faith gesture to secure the purchase agreement.

In the event the buyer moves forward with the sale, this money is typically credited toward the purchase price at closing. If the transaction falls through due to the buyer's failure to meet the terms of the contract, the seller may be entitled to keep the earnest money as compensation for the lost opportunity.

This understanding of earnest money is distinct from other options presented. Funds paid at closing are related to the finalization of the sale rather than the initial commitment by the buyer. Fees for appraisals and inspections refer to costs associated with due diligence prior to closing, while money used for repairs pertains to addressing issues with the property itself and does not relate to the buyer's demonstration of intent.