Massachusetts Real Estate License Practice Test

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Study for the Massachusetts Real Estate License Test. Prepare with multiple choice questions and explanations. Ace your exam with comprehensive practice!

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

To cover closing costs
To serve as evidence of a buyer's good faith
To secure a loan
To pay property taxes

The correct answer is: To serve as evidence of a buyer's good faith

The purpose of earnest money in a real estate transaction is to serve as evidence of a buyer's good faith. By providing earnest money, a buyer demonstrates their serious intent to follow through with the purchase. This deposit shows the seller that the buyer is committed and is not making an offer casually. When the buyer submits an offer on a property, the earnest money deposit signals to the seller that the buyer is financially capable and is genuinely interested in purchasing the property. If the transaction proceeds, this money is typically applied toward the purchase price or closing costs. However, if the deal falls through under certain conditions stipulated in the contract, such as a failed inspection or financing issues, the earnest money may be returned to the buyer. Conversely, if the buyer backs out without a valid reason, the seller may keep the earnest money as compensation for the time the property was off the market. In contrast, options like covering closing costs, securing a loan, or paying property taxes do not accurately reflect the function of earnest money within the context of a real estate transaction.