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

Earnest money serves a crucial role in real estate transactions, primarily as a demonstration of the buyer's commitment to purchasing a property. When a buyer submits earnest money, it acts as a deposit that indicates their serious intention to follow through with the purchase. This financial commitment reassures the seller that the buyer is genuinely interested and likely to complete the transaction, which can be particularly important in competitive markets. If the deal goes through, the earnest money is typically applied toward the buyer's down payment or closing costs.

By securing the buyer's offer, earnest money also serves to establish a sense of trust between the buyer and the seller, providing both parties with additional confidence as they proceed with the transaction process. This is contrasted with other options, which do not accurately reflect the primary function of earnest money. For instance, it is not specifically set aside for agent fees, repair deposits, or finalizing transaction costs, which are handled differently within the overall process of buying and selling real estate.