Massachusetts Real Estate License Practice Test

What is the role of earnest money in the purchase process?

1. It serves as a complete down payment

2. It shows the buyer’s dedication to the purchase

3. It covers all closing costs

4. It is refunded after the closing process

The correct answer is: It shows the buyer’s dedication to the purchase

The role of earnest money in the purchase process primarily revolves around demonstrating the buyer’s commitment to the transaction. By providing earnest money, the buyer is effectively signaling to the seller that they are serious about purchasing the property. This financial commitment can help differentiate the buyer from others who may be interested in the same property, showing a level of intent and trustworthiness that can be critical in a competitive market. Earnest money is typically a small percentage of the purchase price and is held in escrow until closing. It is not meant to be the full down payment nor is it intended to cover all closing costs, which are separate expenses incurred during the transfer of property ownership. While earnest money can be applied toward the buyer's overall costs, it is not automatically refunded after closing; instead, it serves either to secure the offer or, potentially, is forfeited in cases where the buyer fails to follow through without a valid reason according to the terms of the purchase agreement. Thus, option B accurately captures the essence of earnest money as a tool for establishing buyer dedication in the real estate transaction process.