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

Earnest money serves as a key indicator of the buyer's commitment to the transaction. By providing earnest money, the buyer demonstrates serious intent to follow through with the purchase, which can make the offer more attractive to the seller. This upfront payment is typically held in trust until the deal closes, and it can signal to the seller that the buyer is financially capable and genuinely interested in completing the sale.

The purpose of earnest money is not related to securing a loan or directly serving as a down payment. While it may also contribute to the down payment at closing, it is primarily a way to strengthen the buyer's offer. Additionally, earnest money does not cover closing costs, which are separate expenses incurred during the finalization of a real estate transaction. Therefore, the correct understanding of earnest money lies in its role as a commitment device within the buying process.