Due Diligence and Earnest MoneyIn any dealing among finances, there is ultimately some form of risk, especially when put in the context of a real estate transaction. Rather than role the dice, lenders, buyers and sellers alike abide by certain implementations in order to diminish the uncertainty in any given undertaking.
Due Diligence - The due diligence process is part of the greater mortgage underwriting procedure, and exists to protect both the lender and seller by double checking all information put forth by the buyer/borrower. This information includes the individual's credit score, debt-to-income ratio, w2's, bank statements among other vital figures
Earnest Money - The earnest money put forth in a real estate transaction is supplied by the borrower and is paid either to the seller or is held in escrow by a third party, unrelated to either extraneous. This money can be seen as a preliminary down payment, and is paid to place the property in question on hold. The money signifies the buyer's confidence concerning their ability to successfully surpass any/all possible hurdles they may encounter during the mortgage underwriting process. Once the buyer is cleared to close, the earnest money is simply put toward the official down payment the buyer places on the property in question.
Both of these processes persist to ensure that the borrower/buyer meets all criteria and reduces as much rick in the process as possible.