What is an earnest money deposit?

An earnest money deposit is a payment made by a buyer to demonstrate their serious intent to purchase a property. This deposit shows the seller that the buyer is committed to the transaction and acts as a sort of "good faith" gesture. The amount is typically held in escrow and is applied to the buyer's closing costs or down payment at the closing of the sale. This practice helps to protect the seller against the possibility of a buyer backing out of the agreement without valid reasons, as the earnest money can be forfeited in certain situations, thereby incentivizing the buyer to proceed with the transaction.

The other options do not accurately represent the purpose of an earnest money deposit. While the processing of paperwork is necessary in real estate transactions, it is not what an earnest money deposit signifies. Similarly, costs associated with appraisals and down payments on closing costs are separate financial considerations that do not relate to the intent demonstrated by an earnest money deposit.