According to transaction data, home sales are falling through at a higher rate than in recent years. When a sale falls apart, one of the first questions sellers and buyers ask is: Who keeps the earnest money deposit? The answer depends on why the deal fell through and what the purchase agreement says. If the buyer backs out for a reason protected by a contract contingency, they usually receive their earnest money back. If the buyer cancels without a valid contingency, the seller may be entitled to keep the deposit. In this guide, we’ll explain how earnest money works, when buyers get it back, and when sellers may legally keep it.
Earnest money is a good-faith payment that shows the buyer is serious about purchasing your home. Buyers typically submit these funds shortly after their offer is accepted. The money is then held by a neutral third party until the transaction closes or the contract is canceled. The deposit provides the seller with financial protection if the buyer backs out without justification. If the transaction closes successfully, the earnest money is credited toward the buyer’s down payment or closing costs. Linda Quinn, a top real estate agent in Portland, Oregon, with 50 years of experience, explains that the earnest money deposit is often considered an important element reinforcing a legally binding home purchase agreement. “There are four necessary things to actually have a legal contract: the start and stop dates, the parties to the transaction, and then the compensation,” she says. “Without the deposit, it is unlikely that it would have the legal definition of a contract between a buyer and a seller.” The amount of earnest money your buyer offers will vary depending on the market and the price of your home. Common ranges include: For example, on a $500,000 home, a typical deposit might range from $5,000 to $15,000. To get an idea of what you can expect, check out the earnest money calculator below: As the seller, you can keep the earnest money if your buyer breaches the contract or backs out without a valid contingency reason. If the sale falls through due to a valid, unmet contingency, such as a failed inspection, appraisal, or loan denial, the buyer usually gets the deposit back. Sellers typically receive the earnest money only if the buyer breaches the contract without a valid contingency. Some situations: In these situations, the deposit can serve as compensation to the seller for lost time and opportunity. It can be frustrating to have taken your home off the market and stopped accepting offers, and then have the buyer walk away from the deal. If the cancellation occurs within the contractually allowed “due diligence” period or because of a failed contingency (for example, financing falls through or the inspection reveals major issues). If the parties cannot agree on who receives the money, the funds typically remain in a neutral third-party account until a court order or signed release determines how the deposit will be distributed. In some cases, both parties agree to cancel the contract and return the funds. “All of the earnest monies that we’re working with go to a neutral party, which is escrow,” Quinn explains. “In some states, there are trust funds set up by the real estate companies, and they will hold the earnest money deposit for the buyer.” Next, let’s look at the most common contingency clauses that determine whether a buyer keeps their earnest money if a deal is canceled.What is an earnest money deposit?
How much is a typical earnest money deposit?
Try our earnest money calculator
Who keeps the earnest money if the deal falls through?
When the seller keeps it:
When the buyer gets it back:
