What is Earnest Money?

Earnest money is a payment made in good faith to secure a transaction. This payment is made by buyer to the seller (service provider). It is mostly made in real estate transaction. It is made to ensure that transaction will be completed at some point in the future. If a buyer does not complete the transaction according to the underlying agreement, the earnest money will be forfeited to the seller.

How is Earnest Money Used?

Earnest money provides security for a contract. When buyer pays earnest money it is either retained with seller or held by a third party (escrow agent). The amount of earnest money is deducted from the amount owed at the finalization of the transaction. The amount of earnest money varies depending upon the type of transaction and location. In some countries, it is a percentage of sale price (e.g. 5% or 10%). In some places, the amount of earnest money is fixed. In these places, buyers pay a fixed amount of earnest money at the time of contracting.