PSI New Jersey Real Estate State Practice Exam

In real estate, what does the term 'earnest money' typically refer to?

1. A security deposit for renting

2. A buyer's deposit showing serious intent

3. A fee for property inspections

4. A closing cost estimate

The correct answer is: A buyer's deposit showing serious intent

Earnest money is a deposit made by a buyer when they enter into a purchase agreement. This deposit serves as a demonstration of the buyer's serious intent to buy the property and is typically held in escrow until the closing of the sale. By providing earnest money, the buyer shows the seller that they are committed to the transaction, which can help to strengthen the buyer's offer in a competitive market. The amount of earnest money can vary depending on local customs and the specifics of the deal, but it is generally a small percentage of the property's purchase price. If the sale goes through, earnest money is typically applied towards the buyer's down payment or closing costs. If the buyer backs out without a valid reason that is covered in the contract, they may forfeit the earnest money to the seller as compensation for the seller’s time and effort.