This "deposit" shows good faith and that you intend to follow through with the contract. If you back out of the contract for anything other than a major reason, typically earnest money is kept by the seller.
Most states now allow financing contingencies to be written into purchase contracts, such as, contingent upon buyer receiving financing at 6.5%. If the buyer can't qualify, the ernest money must be returned. This is another good reason to get your mortgage professional involved early.
Also, this is another good reason to use a real estate agent when making a purchase. I can refer you to a good real estate agent if you need one.
Earnest money shows interest and the seriousness of making a bid on a property. There is no set amount of earnest money that is required for every home purchase transaction. Earnest money can be as low as $0 or as high as the buyer wants to make it. If you are a serious bidder bidding on a house that should probably sell very quickly or you really want a house very badly it may not be a bad idea to give a large earnest money deposit with your bid. A very large earnest money deposit (say 10K or 20k) shows that you are a very serious bidder and you are very interested in the house. A seller is generally more apt to sell to a bidder with a large earnest money deposit than they are to someone who offers a $100 dollar earnest money deposit. If something happens and the buyer tries to back out of the deal at the end the seller will have a lot more to gain from the large earnest money deposit than the smaller one. This is a good reason to consult with your realtor and mortgage consultant early on so that you can figure out what a good earnest money deposit may be for you and your financial situation.
Most contracts have a stipulation or clause that states that earnest money is to be refunded if buyers cannot qualify for a mortgage loan. Stipulations such as this make it very important to seek loan approval as quickly as possible. Some sellers will not except a contract from a buyer without an approval letter.
Earnest money is applied to your down payment and closing costs at settlement. The listing agent holds the earnest money in an Escrow account until closing, and brings a certified check for the amount to closing.
Earnest money is still needed even if you obtain 100% financing. If so, the money will be applied to the closing costs associated with your loan.
Money that you give to the home owner to insure an offer to buy the home. The earnest money will be applied to the final price of the house, but will be forfeited if you back out without legal cause.