What is the purpose of an earnest money deposit?

The purpose of an earnest money deposit is primarily to demonstrate the buyer's intent to purchase the property. This deposit acts as a show of good faith from the buyer, indicating their commitment to follow through with the transaction. By placing this money into escrow, the buyer reassures the seller that they are serious about their offer, which can strengthen the buyer's negotiating position.

In a real estate transaction, the earnest money is typically held by the real estate brokerage or an escrow company until the sale is finalized. If the transaction proceeds as planned, the earnest money often gets applied towards the buyer's closing costs or down payment. Conversely, if the buyer backs out of the agreement without a legitimate reason as outlined in the purchase agreement, the seller may have the right to retain the deposit as compensation for taking the property off the market.

This contrasts with the other options provided, which do not accurately represent the primary role of an earnest money deposit. For instance, while closing costs, real estate commissions, and financing are all significant aspects of real estate transactions, they do not relate to the initial intent of the buyer conveyed through the earnest money deposit.