What is 'earnest money' and who holds it?

EARNEST MONEY (also called a good-faith deposit or escrow deposit) is a sum the buyer deposits when a purchase contract is signed, demonstrating commitment to the transaction. Key points: HELD IN TRUST by the listing broker, selling broker, or escrow company — not by the seller or agent personally (this is a trust account requirement); NOT the buyer's down payment (that comes at closing); AMOUNT: typically 1-3% of purchase price in most markets; FORFEITURE: if the buyer defaults without contractual justification, the seller may be entitled to the earnest money as liquidated damages (governed by the contract); RETURN: if the sale falls through due to a failed contingency (inspection, financing), the earnest money is typically returned to the buyer.