Earnest money is a good-faith deposit buyers make when submitting an offer on a home. It’s designed to show the seller they’re serious about the purchase and typically ranges from 1% to 3% of the purchase price. The money is held in escrow and is typically applied towards the buyer’s closing costs or down payment. However, if the deal falls through, the seller may be entitled to keep it depending on the terms of the contract.
So when can a seller legally keep the earnest money deposit? The short answer: when the buyer fails to meet the terms of the contract without a valid, agreed-upon reason.
Below, this Redfin article breaks down the situations where a seller is within their rights to keep the earnest money, along with examples to help make sense of it all.
1. Buyer violates a term of the contract
Real estate contracts are more than just price and dates – they outline specific obligations for both the buyer and seller. If a buyer acts outside the bounds of that agreement, even unintentionally, and the deal falls through as a result, it can be considered a breach of contract. When that breach isn’t protected by a contingency, the seller may have the right to keep the earnest money as compensation for lost time and missed opportunities.
Violations can include a wide range of actions, such as:
- Accessing the property without permission.
- Performing unauthorized inspections or repairs.
- Moving in or storing belongings early without a formal written agreement.
- Changing the financing structure (like moving from a conventional loan to FHA) without written consent.
- Failing to deliver required documents (like updated proof of funds or loan pre-approval) by the contract deadlines.
Example scenario:
The buyer’s contract requires them to provide a mortgage commitment letter by a certain date. They switch lenders mid-process and fail to notify the seller, which delays the loan approval and causes them to miss the financing deadline. Since they violated the contract terms and didn’t request an extension, the seller may be entitled to the earnest money.
2. Buyer backs out of the deal without a contingency
Most real estate contracts include contingencies – built-in conditions that must be met for the sale to move forward. These include financing, home inspection, and appraisal contingencies. If a buyer walks away from the deal outside of those protections, they’re often in breach of contract, and the seller may be entitled to the earnest money.
Example scenario:
The buyer waives the inspection contingency to make their offer more competitive. Later, they discover minor issues during an informal walk-through and decide to back out of the deal. Because they didn’t have an inspection contingency in place, the seller may be entitled to keep the earnest money.
3. Buyer misses a deadline in the contract
Real estate contracts come with strict timelines for things like completing inspections, securing financing, and submitting earnest money. If a buyer fails to meet one of those deadlines and doesn’t formally request an extension or terminate the contract under a valid contingency, the seller may have grounds to keep the deposit.
Example scenario:
The contract gives the buyer 10 days to complete a home inspection. They fail to schedule it on time and try to back out of the deal on day 15, citing inspection concerns. Since the deadline passed, and no extension was approved, the seller can argue they’re entitled to the earnest money.
4. Buyer fails to close with no valid reason
Delays in closing can occur for a variety of reasons, but not all are legally acceptable excuses. Simply getting cold feet, poor time management, or slow paperwork won’t typically excuse a missed closing date. Buyers are expected to arrive at closing fully prepared – with financing secured, all contingencies satisfied, and required documents completed.
Unless the delay is covered by a contingency or both parties agree to an extension in writing, missing the closing deadline can cost the buyer their earnest money deposit. In these cases, the seller may be entitled to keep the deposit as compensation for lost time and the disruption caused by the failed transaction.
Example scenario:
All preparations for closing are complete, but the buyer asks to delay closing by several weeks. The seller declines the request, and the buyer decides to back out of the deal. Since there’s no contingency or written agreement permitting the delay, the seller is usually entitled to keep the earnest money as compensation.
When does the buyer get earnest money back?
Buyers are typically entitled to a refund of their earnest money deposit if the seller backs out of the deal or if they back out of a home purchase for reasons protected by contingencies outlined in the contract. These contingencies act as legal safeguards, but they must be included in the purchase agreement to apply.
These commonly include:
- Inspection contingency: The inspection uncovers serious issues and the buyer cancels within the contingency window.
- Appraisal contingency: The home appraises below the offer price and the seller won’t adjust.
- Financing contingency: The buyer can’t secure a loan despite reasonable efforts.
- Title contingency: Legal issues with the home’s title prevent the sale from proceeding.
It’s important that buyers act within the timelines specified in the contract and provide proper notice when invoking a contingency. Missing deadlines or failing to follow procedure can result in forfeiting the earnest money, even if the reason for backing out seems valid.
Who decides what happens to the earnest money?
Earnest money is held by a neutral third party, such as a title company or escrow agent, until both buyer and seller agree on its distribution. If there’s a dispute, the funds stay in escrow until resolved through negotiation, mediation, or legal action.
Ultimately, it comes down to what’s written in the contract and whether the buyer acted in good faith. Buyers who back out for valid, contract-protected reasons usually get their money back; otherwise, the seller may be entitled to keep it.
