Earnest money is a specific form of security deposit that shows the applicant is serious and willing to demonstrate an earnest of good faith about wanting to complete the transaction.
The most pressing reason for earnest money is to protect the seller if the buyer backs out.
When a buyer and seller enter into a contract, the seller takes the home off the market while the transaction moves through the entire process to closing. However for whatever reason, if the deal falls through, the seller has to start the process all over again which could lead to a big financial hit.
It's usually around 1% - 3% of the sale price and is held in an escrow account until the deal is complete.
As long as everything goes as expected, the earnest money is applied to the buyer’s down payment or closing costs.
However, if the deal falls through due to a failed home inspection or any other contingencies listed in the contract the buyer gets their earnest money back.
In a competitive real estate market, the sellers tend to favor these good faith deposits because they want to ensure that the sale won’t fall through
-can act as added insurance for both parties in the transaction
-lower the amount you need at closing because it’s applied directly to your down payment or closing costs