What does the term 'earnest money' refer to?

The term 'earnest money' specifically refers to the deposit made by a buyer to indicate serious intent to purchase a property. This amount is typically held in escrow and serves as a demonstration of the buyer’s commitment to the transaction. By putting down earnest money, the buyer signals to the seller that they are serious about moving forward, which can help the seller take the property off the market and can sometimes strengthen the buyer's position in negotiations.

This deposit plays a crucial role in the real estate process, as it provides the seller with a level of assurance that the buyer is willing to follow through with the purchase. If the transaction falls through due to the buyer's failure to meet the terms, the seller may have the right to keep the earnest money as a form of compensation for the time and opportunity lost. Conversely, if all goes well, this money is typically applied to the buyer's closing costs or down payment, showcasing its dual purpose in the buying process.