What is 'earnest money' in a real estate transaction?

Earnest money is a good-faith deposit the buyer pays at the time of signing the purchase contract. It demonstrates serious intent (a buyer with cash at risk is more likely to follow through) and provides the seller some compensation if the buyer defaults. The amount is negotiable, typically 1-3% of the purchase price in residential transactions. Earnest money is held in escrow by a neutral third party (typically the listing brokerage, a title company, or an attorney) and applied to the down payment or closing costs at closing. If the buyer defaults without legal cause, the seller usually keeps the earnest money; if the seller defaults or contract conditions are not met, the buyer gets it back. The amount and treatment are spelled out in the contract.