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

Earnest money serves as a deposit made by the buyer to demonstrate their commitment to purchasing the property. This financial assurance is intended to indicate the buyer's seriousness about the offer and helps to establish trust between the buyer and the seller. When an offer is accepted, the earnest money is typically held in an escrow account and later applied toward the down payment or closing costs at closing.

This initial investment gives the seller confidence that the buyer will proceed with the transaction, thus helping to secure the property while due diligence such as inspections and financing is arranged. If the buyer were to back out of the deal for reasons not specified in the contract, they may forfeit their earnest money to the seller as a form of compensation. This function underscores the critical role that earnest money plays in facilitating the real estate transaction process.