Contracts & Transactions

Earnest Money

A deposit made by the buyer when submitting a purchase offer, demonstrating serious intent and serving as consideration for the contract.

Full Definition

Earnest money (also called a good faith deposit) is a sum of money paid by a buyer at the time of making an offer to purchase real estate. It demonstrates the buyer's serious intent to purchase and serves as consideration to make the contract binding. Earnest money is held in escrow — typically by a title company, real estate brokerage, or attorney — until closing, at which point it is applied toward the buyer's down payment or closing costs. If the buyer defaults without a valid contingency, the seller may be entitled to keep the earnest money as liquidated damages. If the seller defaults, the buyer typically receives the deposit back.

Real-World Example

A buyer offers $350,000 on a home and includes a $5,000 earnest money check to be held in escrow. At closing, the $5,000 is credited toward the buyer's down payment.

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How Earnest Money Appears on the Real Estate Exam

Common question types, tested concepts, and what to watch out for

Know who holds earnest money (escrow/broker, not the seller), what happens if the buyer backs out with vs. without a valid contingency, and that it is credited at closing — not paid to the agent.