In real estate transactions, what role does earnest money typically play?

In real estate transactions, earnest money plays a crucial role as a demonstration of the buyer's intent to purchase. This monetary deposit is typically provided by the buyer when making an offer on a property, signifying that they are serious about their intent to complete the transaction. By putting down earnest money, the buyer shows commitment to the agreement and increases the seller's confidence in the legitimacy of the offer.

If the transaction proceeds successfully, the earnest money is usually applied toward the down payment or closing costs. Conversely, if the buyer decides to back out of the deal without a valid reason outlined in the contract, they may forfeit this deposit. This mechanism helps protect the seller and serves as an incentive for the buyer to follow through with the purchase.

The other options do not accurately represent the typical function of earnest money in real estate transactions.