What does the term “earnest money” refer to in a real estate transaction?

In a real estate transaction, "earnest money" refers to a deposit made by the buyer to demonstrate their serious intent to purchase a property. This deposit is typically held in a trust account and shows the seller that the buyer is committed to following through with the purchase. The earnest money is often credited toward the buyer's down payment or closing costs if the sale proceeds successfully.

This practice serves to protect the seller's interests by ensuring that the buyer is genuinely interested and willing to move forward. If the buyer backs out of the transaction without valid cause, the seller may have the right to keep the earnest money as compensation for taking the property off the market. This distinction is crucial in real estate transactions as it sets the tone for the commitment level of both parties and helps facilitate a smooth negotiation process.