What does the term "earnest money" signify in a real estate transaction?

The term "earnest money" refers to a deposit made by a buyer to demonstrate their seriousness and commitment in purchasing a property. This deposit serves multiple purposes: it shows the seller that the buyer is genuinely interested in the transaction, helps to secure the property while negotiations take place, and can be applied towards the purchase price at closing. Earnest money is typically held in escrow until the transaction is finalized. If the sale goes through, the earnest money is credited towards the buyer’s closing costs or down payment. If the sale falls through due to the buyer’s failure to fulfill contractual obligations without a valid reason, this money can often be forfeited to the seller.

The other options do not accurately capture the essence of earnest money. A discount offered to buyers is unrelated to demonstrating commitment in a transaction. A fee paid to realtors refers to compensation for services rendered in listing a property, which does not align with the concept of earnest money. Lastly, an insurance policy for home buyers pertains to protection against potential property issues, again not relevant to the commitment that earnest money signifies.