Buyers today understand they need a sizeable down payment and a strong credit score to secure a conforming home loan. They must hold liquid funds for another financial obligation—an earnest money deposit—to be paid when they make an offer on a home.

Earnest money is handed over to the seller’s agent or the title company when a purchase contract is signed. This demonstrates that the buyer is serious about the transaction and is backing it up with cash.

Without this, buyers could simply make offers on many homes, essentially taking them off the market until they choose a favorite. Sellers rarely accept offers without it.

There is no set amount for an earnest money deposit, so it’s negotiable. If there are multiple bidders, the seller may ask for up to 3% of the asking price as earnest money. Assuming the transaction results in an accepted offer, earnest money goes toward the buyer’s down payment and closing costs. If the transaction falls through, the buyer may have to forfeit a nominal cancellation fee or more.

Be sure the purchase agreement outlines the refund process. Remember, a buyer can lose earnest money through default, which happens when he or she does not perform according to the terms stipulated in a purchase and sale agreement.

Work carefully with your agent to ensure a clear understanding of all terms and obligations.