What is the purpose of an earnest money deposit?

The purpose of an earnest money deposit is to demonstrate the buyer's good faith and commitment to the transaction. When a buyer makes an offer on a property, the earnest money serves as a financial indication that they are serious about purchasing the property. This deposit reassures the seller that the buyer intends to follow through with the transaction, which can be especially important in competitive real estate markets.

This commitment can also help the seller feel more secure in accepting the buyer's offer over others. Typically, the earnest money is held in trust until the transaction closes, at which point it is often applied towards the buyer's down payment or closing costs. However, if the buyer fails to proceed with the purchase without a valid reason, the seller may be entitled to keep this deposit as compensation for the time and resources spent on the transaction.

Other options do not fully capture the primary intent of an earnest money deposit. For example, while it can assist in securing a property, this function is secondary to its role as evidence of the buyer's earnest intention. The earnest money deposit is not intended to cover closing costs directly, nor is it designed to compensate sellers for damages. Instead, it’s fundamentally about affirming the buyer's commitment to complete the sale.