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

Earnest money serves as a demonstration of the buyer's commitment to the purchase of the property. By providing this monetary deposit, the buyer signals to the seller that they are serious about moving forward with the transaction. It reflects good faith and helps alleviate any concerns the seller may have about the potential buyer backing out of the agreement.

When a buyer offers earnest money, it also plays a key role in the negotiation process, as it can make their offer more attractive to the seller compared to other offers that may not include such a deposit. If the transaction proceeds to closing, this money is typically applied to the buyer's down payment or closing costs. If the deal falls through due to the buyer's failure to meet the conditions of the purchase agreement, the seller may retain the earnest money as compensation for taking the property off the market.

Other options, while they describe aspects of real estate transactions, do not accurately capture the primary function of earnest money. For instance, closing costs are typically separate expenses that need to be handled differently, and repairs or home inspections involve different financial considerations and processes.