Q: What is earnest money for?

A: Earnest money is like "good faith" money a buyer deposits up front when he or she offers to buy a property. It says to the seller: "I am serious, and I intend to buy your property. I won't waste your time."

   Once the buyer and seller have entered into a contract, the seller may stop showing his or her property to potential buyers. It's possible the seller could miss out on a better offer while the property is under contract to the buyer.

   If the buyer (who should have been pre-approved for a mortgage loan) shows good faith and actually purchases the property, he or she gets the earnest money deposit back in the form of a credit. The credit is applied toward the purchase price. 

   If the buyer is denied a mortgage loan, and cannot buy the property for that reason, he or she gets the earnest money back. Or the buyer may exercise the option to terminate the contract within a period of time known as the Due Diligence Period, in which case the earnest money is refunded. 

   However, if none of the above apply and the buyer defaults on the contract, and fails to purchase the property as agreed, the seller may have the earnest money as "liquidated damages." The broker who holds the earnest money is authorized to give it to the seller. 

   You know the old saying, "Let the buyer beware." If you are sure you want to buy a property, go ahead and put up some earnest money. However, if you change your mind after your Due Diligence Period expires, you are on the hook to buy the property "as is." If you don't, you probably will lose your earnest money.