Maine Real Estate License Practice Exam

What is the purpose of an earnest money deposit in a real estate transaction?

1. To act as a security for the seller's obligations

2. To ensure the buyer has a financial stake in the property

3. To cover the closing costs on behalf of the buyer

4. To guarantee the buyer will not back out of the contract

The correct answer is: To ensure the buyer has a financial stake in the property

The purpose of an earnest money deposit in a real estate transaction is to ensure the buyer has a financial stake in the property. This deposit demonstrates the buyer's serious intent to purchase the property and provides a level of security for the seller that the buyer is committed to following through with the transaction. By putting down earnest money, the buyer shows they are financially invested in the deal, which can help build trust between both parties. In many cases, if the transaction proceeds as planned, the earnest money is applied to the buyer's down payment or closing costs at the end of the sale. However, if the buyer backs out of the agreement without a valid reason, they may forfeit this deposit, reinforcing the importance of their commitment. While there are other functions that a deposit may serve in different contexts, the fundamental purpose of an earnest money deposit primarily revolves around the buyer's financial commitment to the transaction. It is not meant to cover closing costs, act as a security for seller obligations, or serve as a binding guarantee that the buyer cannot withdraw from the deal.