What is the relationship between earnest money and the purchase price?

Earnest money is a deposit made by a buyer to demonstrate their commitment to purchasing a property. This money serves as a sign of good faith and is usually held in escrow until the transaction is completed. The correct understanding of earnest money in relation to the purchase price is that it is deducted from the purchase price at closing.

When the sale proceeds to closing, the earnest money deposit reduces the total amount the buyer must pay for the property. For example, if a buyer agrees to a purchase price of $300,000 and has put down $5,000 as earnest money, the actual cash payment due at closing would be $295,000. This process helps streamline the transaction, making it clear how earnest money contributes to the final financial obligations of the buyer.

In contrast, the other options describe relationships that do not accurately reflect how earnest money functions within a real estate transaction. For instance, stating that earnest money is a fee separate from the purchase price ignores its role in contributing to that price. Similarly, saying that it is added to the commission of the real estate agent misconstrues the purpose of earnest money entirely, as it is strictly associated with the buyer's offer rather than agent commissions. Lastly, suggesting that earnest money does not affect the