What is "earnest money" generally used for in real estate transactions?

Earnest money is typically used to signify the buyer's serious intent in a real estate transaction. When a buyer places earnest money with their offer, it demonstrates their commitment to purchasing the property. This money acts as a good faith deposit, assuring the seller that the buyer is serious about moving forward with the transaction.

Should the deal proceed, the earnest money is usually credited toward the buyer's down payment or closing costs. However, if the purchase agreement falls through due to reasons specified in the contract (like inspection issues or financing problems), the buyer may be entitled to a refund of their earnest money. Conversely, if the buyer backs out without a valid reason, the seller may keep the earnest money as compensation for the disruption.

The other options do not accurately reflect the primary purpose of earnest money. For example, while it could be indirectly related to securing a loan since it shows the buyer is serious, earnest money itself does not secure financing. It also does not cover closing costs or pay agent commissions directly; those costs are handled separately in the transaction and are not the primary function of earnest money.