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

The purpose of earnest money in a real estate transaction is to demonstrate the buyer's commitment to purchasing the property. When a buyer submits earnest money with an offer, it serves as a financial deposit that indicates serious intent. This initial payment assures the seller that the buyer is not only interested but also willing to invest a portion of the purchase price upfront.

This commitment can help distinguish serious buyers from those who might just be exploring options. It reinforces the buyer's offer and can also be a negotiating tool, as it suggests the buyer is ready to proceed with the transaction. If the sale goes through, the earnest money is typically applied toward the purchase price at closing. If the transaction does not go ahead due to issues outlined in the purchase agreement, the buyer may be entitled to a refund of the earnest money. This mechanism provides both parties with a degree of security and confidence in moving forward with the transaction.

In contrast, earnest money is not used specifically for covering the closing costs, inspection fees, or securing financing, which are different aspects of the overall transaction.