In real estate contracts, what does "earnest money" signify?

Earnest money is a deposit made by a buyer to show their serious intent to purchase a property. This financial commitment serves as a good faith gesture that indicates to the seller that the buyer is fully invested in the transaction. By providing earnest money, the buyer is signaling their intention to move forward with the purchase, which can help to distinguish them from other potential buyers who may not have similar commitments.

Typically, this earnest money is held in an escrow account until the sale is finalized or the contract is terminated based on certain contingencies. If the transaction proceeds smoothly to closing, the earnest money is usually applied toward the buyer's down payment or closing costs. However, if the buyer fails to fulfill the terms of the contract without legal justification, they may forfeit the earnest money as compensation to the seller for taking the property off the market during the negotiation period.

This concept is crucial in real estate transactions as it instills a level of trust between the parties involved while protecting the interests of both buyers and sellers.