What is Earnest Money in real estate transactions?

Earnest money refers to a deposit made by a buyer to demonstrate their serious intent to purchase a property. It is typically a small percentage of the purchase price and is presented alongside an offer to buy real estate. This deposit serves as a reassurance to the seller that the buyer is genuinely interested in moving forward with the transaction, thus showcasing good faith in the offer.

If the transaction proceeds and closes successfully, the earnest money usually gets credited toward the buyer's down payment or closing costs. Conversely, if the buyer backs out of the deal without a valid reason outlined in the purchase agreement, the seller may retain the earnest money as compensation for the time and resources lost due to the failed transaction. This mechanism helps to balance the interests of both parties by promoting commitment.

In contrast, other options do not accurately define earnest money. A portion of the purchase price given after closing relates to the final transaction and does not reflect the intent signified by the earnest deposit. A non-refundable fee for inspections is more akin to service costs incurred during the inspection process, whereas earnest money is specifically about ensuring commitment to the sale. Lastly, a loan amount to secure the real estate does not align with the essence of earnest money, which is not a loan but rather a demonstration of