Earnest money is put down before closing on a house to show you’re serious about purchasing. It’s also known as a good faith deposit.
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When a buyer and seller enter into a purchase agreement, the seller takes the home off the market while the transaction moves through the entire process to closing. If the deal falls through, the seller has to relist the home and start all over again, which could result in a big financial hit.
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Earnest money protects the seller if the buyer backs out. It's typically around 1% – 3% of the sale price and is held in an escrow account until the deal is complete. The exact amount depends on what’s customary in your market. If all goes smoothly, the earnest money is applied to the buyer’s down payment or closing costs.
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If the deal falls through due to a failed home inspection or any other contingencies listed in the contract (we’ll look at those contingencies in a bit), the buyer gets their earnest money back. The practice of depositing earnest money can decrease the likelihood of a buyer placing offers for multiple homes, then walking away after the seller takes the home off the market.