What is earnest money and what happens to it if a deal falls through?

Earnest money is a deposit made by the buyer when submitting an offer, demonstrating serious intent to purchase the property. It is typically held in an escrow or trust account by the listing brokerage, title company, or attorney. If the transaction closes successfully, earnest money is applied toward the purchase price. If the buyer cancels within the terms of a valid contingency, the earnest money is returned. If the buyer defaults without a contractual right to cancel, the seller may be entitled to keep the earnest money as liquidated damages, depending on the contract terms and state law.