In a sales contract, what does the term "earnest money" typically refer to?

In a sales contract, "earnest money" refers to a payment made by the buyer as a sign of good faith to show their serious intent to proceed with the purchase. This deposit demonstrates to the seller that the buyer is committed to completing the transaction. Typically, earnest money is held in escrow until the closing of the transaction, at which point it is often applied toward the buyer's down payment or closing costs.

The use of earnest money serves multiple purposes: it helps to deter buyers from making frivolous offers and provides the seller with some assurance that the buyer is financially capable and genuinely interested in purchasing the property. If the transaction falls through due to certain conditions specified in the contract, the earnest money may be refundable to the buyer, depending on the terms agreed upon.

The other options, while they represent aspects related to real estate transactions, do not accurately describe earnest money. The context of earnest money is rooted in the initial commitment to the sale, distinguishing it from additional fees or payments that are made later in the process.