Earnest money, in the context of a real estate transaction, refers to a sum of money paid by a prospective buyer to the seller as a show of good faith and commitment. It serves as a gesture of serious intent from the buyer, indicating their willingness to move forward with the purchase. Typically, this amount is held in escrow by a neutral third party, such as a real estate agent or an attorney, until the deal is finalized or terminated. Once the sale is completed, the earnest money is usually applied towards the down payment or closing costs. In the event that the transaction falls through due to certain contingencies, such as inspection issues or financing problems, the earnest money may be refunded to the buyer. However, if the buyer backs out of the deal without valid reasons, the seller may be entitled to keep the earnest money as compensation for the time and effort invested in the transaction.