What is the primary purpose of earnest money in a real estate transaction?

The primary purpose of earnest money in a real estate transaction is to act as a deposit that demonstrates the buyer's good faith to the seller. When a buyer presents earnest money, it indicates their serious intent to purchase the property and provides assurance to the seller that the buyer is committed to completing the transaction. This deposit can also serve as a financial incentive for the seller to take the property off the market while negotiating terms with the buyer.

In addition to demonstrating good faith, the earnest money is typically applied toward the buyer's down payment or closing costs once the transaction is finalized, reinforcing the buyer's commitment to following through with the purchase. If the transaction does not close due to the buyer's fault, the seller may be entitled to keep the earnest money as compensation for their time and potential loss.

In contrast, earnest money is not primarily intended to cover closing costs or to compensate the agent. Moreover, it does not directly secure financing for the purchase; rather, that is typically handled through the buyer's mortgage application process. Thus, the focus on earnest money being a good faith deposit encapsulates its essential role in facilitating a trustworthy and earnest transaction between a buyer and seller.