What does "earnest money" represent in a property transaction?

Earnest money serves as a deposit made by a buyer to demonstrate their serious intent to purchase a property. This financial commitment is typically submitted along with an offer to purchase, indicating to the seller that the buyer is genuinely interested and willing to follow through with the transaction. The amount of earnest money can vary, but it is usually a percentage of the property's purchase price.

In the event that the transaction proceeds, the earnest money is often applied towards the buyer's down payment or closing costs. Conversely, should the deal fail due to circumstances covered in the purchase agreement (such as buyer financing issues or a failed inspection), the buyer may be entitled to a refund of their earnest money. However, if the buyer backs out of the agreement without a valid reason, they risk losing this deposit, which reinforces its purpose as a show of good faith in the transaction process.

Other options provided do not accurately reflect the nature or purpose of earnest money in a real estate transaction, focusing instead on fees or costs unrelated to the buyer's commitment to purchase.