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

The primary purpose of earnest money in a real estate transaction is to serve as a deposit that indicates good faith from the buyer. When a buyer submits an earnest money deposit, it demonstrates their intention and commitment to purchase the property. This deposit reassures the seller that the buyer is serious about completing the transaction, which can enhance the buyer’s position in negotiations, particularly in competitive markets.

This good faith deposit typically becomes part of the down payment or closing costs once the transaction proceeds. Should the deal fall through due to contingencies outlined in the purchase agreement, the earnest money may be refundable to the buyer. However, if the buyer backs out without a valid reason, the seller might be entitled to keep the earnest money as compensation for the time taken off the market and other related costs.

In contrast, earnest money is not intended to cover potential future repairs, pay for property appraisals, or secure a mortgage application, as these involve separate financial commitments and processes within the realm of real estate transactions.