What is an earnest money deposit, and why is it held by the broker?

• A. A non-refundable fee for the seller
• B. A deposit to cover potential damages
• C. Earnest money is funds showing serious intent; held in escrow to be applied at closing or refunded per the contract terms
• D. It is paid to the lender

Answer: (C)

Earnest money shows the buyer’s serious intent to purchase and is held in escrow by the broker to guarantee that commitment. The funds stay in an escrow account managed by the broker or a title company and are released only according to the contract terms. At closing, the earnest money is usually applied toward the buyer’s down payment or closing costs. If the deal dies because a stated contingency is triggered (financing, inspection, appraisal, etc.), the money is refunded to the buyer per the contract. If the buyer breaches without a valid contingency, the seller may be entitled to the funds as damages per the agreement. The broker’s role as escrow holder protects both parties by ensuring the money is secure and disbursed only as the contract requires.