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Ernest money, also known as a good faith deposit, is a payment made by a buyer to a seller in a real estate transaction to show seriousness in the purchase. It is held in escrow by a third party, who is not a part of the transaction. The money may or may not be refunded if the transaction fails due to reasons like title or inspection issues. The terms of refunding the earnest money are agreed upon by the buyer and seller before finalizing the transaction.