In earnest money context, liquidated damages are what?

• A. payment to buyer if deal falls through
• B. forfeited earnest money to seller
• C. a penalty charged by the lender
• D. a discount on closing costs

Answer: (B)

Liquidated damages are the pre‑set amount of the buyer’s earnest money that the seller receives if the buyer breaches the contract. It’s a fixed remedy agreed in advance to compensate the seller for the loss from a default, not a penalty charged by a lender and not a discount on closing costs. In practice, the earnest money is held in escrow: if the deal goes through, it applies to the purchase price; if the buyer defaults (outside any valid contingencies), the seller can keep that deposit as liquidated damages. This arrangement gives both sides a predictable outcome and avoids the need to prove exact damages in court.