Definition: A good faith deposit made by the buyer to show commitment to purchasing the home.
Explanation: Earnest money is typically 1% to 3% of the purchase price and is placed into an escrow account until closing. If the buyer backs out due to a contingency, such as a failed inspection or financing denial, the deposit is refunded. However, if the buyer withdraws for reasons not covered in the contract, the seller may keep the deposit as compensation for lost time on the market.
Example: A buyer submits a $5,000 earnest money deposit on a $250,000 home. If the purchase moves forward, the deposit is applied toward closing costs or the down payment. If the buyer backs out for reasons not specified in the contract, the seller retains the deposit.