What typically happens to earnest money deposits in a real estate transaction?

In a real estate transaction, earnest money deposits are generally held in escrow. This means that the money is placed with a neutral third party, typically an escrow agent or title company, until the transaction is completed or a specific condition is fulfilled. The purpose of the earnest money is to demonstrate the buyer's good faith and commitment to purchasing the property.

Holding the deposit in escrow protects both the buyer and the seller; it ensures that the funds are secure and not in the direct possession of either party until the terms of the purchase agreement are executed. Once the transaction closes, the earnest money can be applied towards the purchase price, closing costs, or title fees, depending on what is agreed upon in the contract. If the transaction does not proceed as planned, the disposition of the earnest money is typically outlined in the purchase agreement, and the escrow agent follows the instructions based on the circumstances of the deal.