What is an earnest money deposit and its purpose?

• A. Money showing the buyer’s seriousness; held in escrow and applied to purchase price or forfeited if the buyer breaches per contract terms.
• B. Money paid to the seller at closing as a down payment.
• C. A fee paid to a real estate agent for listing services.
• D. A loan origination fee.

Answer: (A)

Earnest money is a security deposit a buyer puts down to show they’re serious about buying. It’s held in escrow by a neutral party while the contract terms—like financing, inspections, and appraisals—are checked. The purpose is to give the seller confidence that the buyer intends to follow through and to compensate the seller if the buyer backs out without a valid reason. At closing, this amount is usually credited toward the purchase price, reducing the cash the buyer needs to bring to closing. If the buyer meets the contract terms, the funds become part of the purchase funds. If the buyer breaches outside agreed contingencies, the seller may keep the earnest money as compensation. If the buyer terminates according to contingencies, the earnest money is typically returned. The exact amount varies, but it’s not a down payment itself and it’s not a fee to the seller, an agent, or a loan origination fee.