Housing Counselor Certification (HUD) Practice Exam

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What is the primary purpose of an earnest money deposit in a real estate transaction?

To secure financing for the buyer
To compensate the seller for their time
To show the seller the buyer's commitment
To cover closing costs

The correct answer is: To show the seller the buyer's commitment

The primary purpose of an earnest money deposit in a real estate transaction is to show the seller the buyer's commitment. This deposit acts as a good faith gesture that illustrates the buyer's seriousness about entering into the contract. By putting down earnest money, the buyer signals to the seller that they are invested in the transaction and are less likely to back out without a legitimate reason. This commitment helps to foster trust in the negotiations and can facilitate the overall process of buying the home. While the other options touch on related concepts, they do not accurately capture the core intent of earnest money. Securing financing, compensating the seller for their time, or covering closing costs are not the primary functions of this deposit; instead, they are components of the broader home-buying process that can occur independently of the earnest money aspect. The earnest money is fundamentally about establishing a serious intent to purchase and protecting the interests of the seller during the negotiation period.