What is meant by "earnest money"?

Earnest money refers to the deposit made by a buyer to demonstrate their serious intent to purchase a property. This money is typically submitted along with the purchase offer and functions as a good faith measure to reassure the seller that the buyer is committed to completing the transaction. The amount of earnest money can vary but is generally a small percentage of the purchase price.

If the sale is successfully completed, this money is often applied towards the down payment or closing costs. However, if the buyer backs out of the deal without a valid reason outlined in the purchase agreement, the seller may have the right to retain the earnest money as compensation for taking the property off the market and potentially missing out on other buyers. This shows the practical purpose of earnest money in real estate transactions, serving to protect the interests of both parties involved.