What is the purpose of an earnest money deposit?

An earnest money deposit is primarily intended to demonstrate the buyer's commitment to the purchase of the property. By providing this deposit when making an offer, the buyer signals their serious intent to proceed with the transaction. This financial commitment helps to solidify the buyer's position, as it shows the seller that the buyer is motivated and has a genuine interest in completing the deal. The earnest money is typically held in escrow and may later be applied toward the buyer's down payment or closing costs once the transaction is finalized. This practice not only protects the seller by providing a financial assurance that the buyer will follow through, but it also serves to ensure a fair marketplace by filtering out less serious offers.

The other options do not correctly address the fundamental purpose of the earnest money deposit. While the deposit may indirectly help with closing costs in certain scenarios, that is not its primary role. Similarly, it is not intended to pay the real estate agent's commission or directly reduce the property’s purchase price.