Maine Real Estate License Practice Exam

Which of the following describes the nature of the earnest money deposit?

1. It is a required charge for real estate agencies

2. It acts as a guarantee of good faith in the transaction

3. It is optional and depends on the seller's preference

4. It serves as a penalty for failure to close

The correct answer is: It acts as a guarantee of good faith in the transaction

The earnest money deposit functions as a guarantee of good faith in a real estate transaction. This deposit is typically provided by the buyer to demonstrate their commitment to purchasing the property. By making this deposit, the buyer signals to the seller that they are serious about the offer, which can strengthen the buyer's negotiating position. This deposit is held in trust until the transaction is finalized, with the understanding that it will be credited toward the buyer's closing costs. If the transaction proceeds as planned, the earnest money is applied to the purchase price. However, if the buyer withdraws from the agreement without a valid reason as outlined in the purchase agreement, the seller may be entitled to keep the deposit as compensation for the inconvenience and time lost. Typically, the amount of the earnest money deposit is negotiable between the buyer and seller, and while it is customary to include it in the offer, it is not a legally required charge for real estate agencies. Thus, it reinforces the buyer's intention, confirming its role as a good faith guarantee rather than simply being a penalty for not completing the sale or an optional favor for the seller.