Definition
When you make an offer, you include earnest money to show you're serious. This deposit is held safely until closing, where it's credited toward your down payment.
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The earnest money deposit (EMD) shows the seller that the buyer is serious about the purchase and is willing to risk funds if they breach the contract. The deposit is held by a neutral third party (escrow agent or title company) and is credited toward the down payment and closing costs at closing. If the buyer defaults without legitimate cause, the seller typically keeps the earnest money; if the seller defaults, the earnest money is returned.
Pro Tip
Your earnest money deposit affects offer competitiveness. Larger deposits show serious intent but tie up more cash.
Example
The buyer deposited $12,750 (3% of the $425,000 purchase price) as earnest money into escrow.