What is an earnest money deposit?

An earnest money deposit is primarily a payment made by a buyer to demonstrate their serious intent to purchase a property. This payment serves as a form of security for the seller, indicating that the buyer is committed to following through with the transaction. The earnest money is typically held in escrow until a closing occurs, at which point it can be applied toward the buyer's down payment or closing costs.

This deposit not only signifies good faith but also provides a level of assurance to the seller that the buyer is serious about completing the sale. It can help to differentiate a buyer's offer from others in competitive situations, as sellers often look for buyers who are ready to commit financially. If the transaction proceeds as intended, the earnest money is credited to the buyer, but if the buyer withdraws without a valid reason outlined in the purchase contract, the seller may be entitled to keep the earnest money as compensation for taking the property off the market.

This understanding of earnest money deposits is fundamental for practicing real estate professionals, as it plays a crucial role in negotiations and transactional processes.