What purpose does earnest money serve in a real estate transaction?

Earnest money serves a crucial role in a real estate transaction by demonstrating the buyer's commitment to purchase the property. When a buyer submits earnest money, it indicates that they are serious about their offer and willing to back it up with a financial commitment. This deposit is typically held in an escrow account until the transaction is completed, providing a level of security for the seller. If the deal goes through, the earnest money is usually applied to the buyer’s down payment or closing costs. If the deal falls through due to contingencies that are not fulfilled by the buyer, they may forfeit the earnest money, thus showing that the deposit acts as a safeguard for the seller against potential last-minute changes in the buyer's intentions. This fosters trust and seriousness in the negotiating process, ultimately facilitating a smoother transaction.