What Is Earnest Money?

Earnest money — sometimes called a good-faith deposit — is the buyer's way of demonstrating commitment once both parties sign the purchase agreement. It signals the buyer has real skin in the game.

The deposit is held in escrow by a neutral third party, usually the title company, not handed directly to the seller. At closing, it's credited toward the purchase price.

If the buyer backs out for a reason not allowed under the contract, the seller may keep the earnest money. If the seller backs out, or the buyer cancels for a contractually permitted reason, it's returned to the buyer.