What is an earnest money deposit?

An earnest money deposit is a sum of money offered to demonstrate the buyer's good faith in a real estate transaction. This deposit shows that the buyer is serious about purchasing the property and is a way to secure the property while the details of the sale are finalized. The earnest money is typically held in an escrow account and may be applied toward the purchase price at closing. This practice helps to protect the seller from potential buyers who may not follow through with the transaction.

The other choices do not accurately represent what an earnest money deposit is. It is not a loan for purchasing the property, as that involves borrowing money and is separate from demonstrating good faith in a transaction. Additionally, it is not a fee paid to a real estate agent; agents are typically compensated through commission rather than earnest money. Lastly, the deposit is not a tax paid upon closing; taxes are related to property transaction fees and state and local regulations, distinct from earnest money's role in negotiating the sale.