National Real Estate Practice Exam

In a real estate transaction, what does "earnest money" represent?

1. Down payment

2. Deposit to secure the deal

3. Closing costs

4. Commission fee

The correct answer is: Deposit to secure the deal

In a real estate transaction, "earnest money" refers specifically to a deposit made by the buyer to demonstrate their serious intention to purchase the property. This deposit is typically submitted along with the purchase offer and acts as a good faith gesture, indicating that the buyer is committed to following through with the transaction. The amount of earnest money can vary but is generally a small percentage of the purchase price. This deposit is held in an escrow account and is applied towards the buyer's down payment or closing costs once the deal progresses. If the transaction successfully closes, the earnest money is credited to the buyer at closing. However, if the buyer withdraws from the agreement without a valid reason as specified in the contract, they may risk losing that earnest money as compensation to the seller for taking the property off the market. The remaining options relate to different aspects of a transaction. A down payment is the amount of money the buyer pays upfront towards the purchase price of the home, separate from the earnest money. Closing costs are the fees associated with finalizing a real estate transaction, such as title insurance, appraisal fees, and lender fees. Lastly, a commission fee is what agents earn for their services in facilitating the sale, typically a percentage of the sale price. Each