PSI New Jersey Real Estate State Practice Exam

How is the earnest money deposit usually applied at closing on a settlement statement?

1. As a loan for the buyer

2. It is used to pay agent commissions

3. Credit the buyer

4. As a payment towards taxes

The correct answer is: Credit the buyer

The earnest money deposit is typically credited to the buyer at closing on a settlement statement. This means that the amount of earnest money the buyer has deposited previously is subtracted from the total amount they are required to bring to closing, effectively reducing their out-of-pocket expenses at that moment. This process serves as a demonstration of the buyer's good faith in the transaction, showing their commitment to proceeding with the purchase. In most real estate transactions, the earnest money deposit is held in trust until closing. At that point, it is applied towards the buyer’s closing costs or the down payment, resulting in a credit on the settlement statement. This ensures that the buyer doesn't need to provide the full amount of the closing costs or down payment again, as part of their earlier deposit is applied to the total amount due. When considering other options, the loan for the buyer doesn’t apply since the earnest money is not a loan but rather a deposit. Using the deposit to pay agent commissions would not be correct because agent commissions are typically paid by the seller. Lastly, while taxes might be a part of the overall costs involved in a real estate transaction, the earnest money deposit itself is not specifically allocated for that purpose at closing.