What is an “earnest money deposit” in real estate transactions?

An earnest money deposit serves as a financial commitment from the buyer to demonstrate their serious intent to purchase a property. This deposit is typically submitted with the offer or shortly thereafter and is held in an escrow account until the transaction is finalized. It reflects the buyer's good faith and can set the stage for negotiations by indicating a level of commitment to the purchase.

This deposit can also be seen as a way to assure the seller that the buyer is earnest in their intentions and not just making a casual inquiry into the property. If the transaction proceeds as planned, the earnest money is generally applied towards the down payment or closing costs. If the deal falls through due to contingencies outlined in the contract, the buyer may have the right to receive their earnest money back, further underscoring its role in the transaction as a show of good faith rather than an initial payment towards the purchase price.