Maine Real Estate License Practice Exam

Which best defines an earnest money deposit?

1. Money deposited and prepaid towards the closing as indicated in a Purchase and Sale agreement

2. Earnest money is held in trust to protect the buyer in case the seller defaults in the contractual obligation(s)

3. Money paid in advance to the title company and credited to the mortgagee within three days of the acceptance of the offer

4. Money held by the real estate brokerage agency for clients and other persons

The correct answer is: Money held by the real estate brokerage agency for clients and other persons

An earnest money deposit is best defined as a sum of money that a buyer offers to demonstrate their genuine interest in purchasing a property. This deposit is typically submitted with the offer and is held in trust until the transaction is finalized. The purpose of this deposit is to show the seller that the buyer is committed to following through with the purchase agreement. The defined options clarify different aspects of earnest money deposits, but the most accurate definition goes beyond simply stating where the money is held or who it is for. Rather than focusing solely on who holds the money, it's essential to understand that the deposit serves as a financial assurance to the seller that the buyer is serious. If the buyer fails to fulfill their obligations under the contract without valid cause, the seller may retain the earnest money as compensation for the time and potential opportunities lost during the transaction process. In this context, the correct answer reflects the role and purpose of an earnest money deposit in real estate transactions. Therefore, options discussing its function in protecting against seller defaults, being paid to a title company, or being held by a real estate brokerage agency do not encapsulate the essence of what an earnest money deposit represents.