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Earnest money, as used in real estate deals, is a down payment the buyer makes to demonstrate their resolve to complete the transaction and purchase the home. Real estate contracts sometimes stipulate the demand for earnest money as a good faith guarantee that the buyer will really complete the transaction.
The amount of earnest money needed can change based on the property's valuation and the regional real estate market. Earnest money often represents a portion of the purchase price and is deposited by a third party into an escrow account until the sale is finalized.
The earnest money is often put toward the buyer's down payment or closing costs if the sale closes. However, if the buyer breaches the terms of the agreement and the sale falls through, the seller may be entitled to keep the earnest money as compensation for the buyer's breach. On the other hand, the earnest money is normally refunded to the buyer if the sale falls through as a result of the seller's violation of the contract.
