What is an earnest money deposit?

An earnest money deposit is fundamentally a payment made by a buyer to indicate their genuine intention to purchase a property. This deposit serves as a form of security for the seller, showing that the buyer is committed to following through with the purchase agreement. It is typically held in a trust or escrow account and is applied to the buyer's down payment or closing costs once the transaction is completed.

This mechanism helps to build trust in real estate transactions, as sellers may be more inclined to negotiate or take the property off the market once they see that a buyer is serious. The amount of the earnest money deposit can vary, often ranging from 1% to 3% of the purchase price, depending on local customs and the dynamics of the real estate market.

In contrast, other options pertain to different aspects of the home buying and financing process. While fees paid to lenders or incurred at closing are indeed important for securing a mortgage, they do not reflect the concept of demonstrating intent to purchase. Similarly, refundable fees for property inspections relate to the costs incurred during the due diligence phase of buying a home rather than the initial display of commitment through an earnest money deposit.