In a real estate transaction, what does the term 'earnest money' refer to?

The term 'earnest money' refers to a deposit made by a buyer to demonstrate their genuine intention to purchase a property. This money is typically held in a trust account until the transaction is completed, or terms are fulfilled. By placing earnest money down, the buyer signals to the seller that they are committed to moving forward with the purchase, providing the seller with assurance that the buyer is serious about their offer.

The deposit often becomes part of the down payment if the sale goes through, but it mainly serves as a good faith gesture to signal the buyer's intent. This distinguishes it from other elements of the transaction, such as fees paid to real estate agents or costs associated with inspections. The trust account aspect is crucial, as it protects both parties during the transaction process, ensuring the funds are handled appropriately and used according to the contract's terms.