What Happens to My Earnest Money If the Deal Falls Through?

Earnest money is a deposit made by the buyer as part of the purchase transaction.

It is generally held by an escrow, title, or other authorized party according to the terms of the transaction.

The deposit demonstrates the buyer's commitment to the purchase, but the contract determines what happens to it if the transaction does not close.

Depending on the contract, a buyer may be entitled to the return of earnest money when a transaction terminates under a valid contractual provision.

For example, certain contingencies may give the buyer a right to terminate if specified conditions are not met.

Possible situations can include:

• A qualifying inspection issue
• A financing contingency
• An appraisal contingency
• A title problem
• Another contractually defined condition

The specific contract language matters.

Earnest money can potentially be at risk when a buyer fails to perform an obligation or terminates outside of a contractual right.

For example, if a buyer simply refuses to close without a contractual basis for termination, the seller may have rights under the agreement.

Exactly what happens depends on the contract and applicable state law.

Sometimes the buyer and seller disagree about who is entitled to the earnest money.

In that situation, the party holding the funds may not simply decide the dispute based on whoasks first.

The contract, applicable procedures, and state law can determine how disputed funds are handled.

Depending on the circumstances, additional documentation, mutual authorization, mediation,arbitration, or legal proceedings may be involved.

These terms are sometimes confused.

Earnest money is a deposit associated with the purchase agreement.

A down payment is the portion of the purchase price the buyer contributes toward the purchaseat closing.

Earnest money may potentially be credited toward the buyer's purchase funds at closing,depending on the transaction.

A buyer who is worried about losing earnest money should first determine:

• What the contract says

• Which contingency or provision may apply

• Whether the applicable deadline has passed

• Whether required notice has been provided

• Why the transaction is not proceeding

The reason the transaction falls apart can be more important than the fact that it did not close.

Earnest money questions are easiest to understand before there is a dispute.

When reviewing an offer, buyers should understand not only how much earnest money they areoffering, but also the conditions under which it may be returned or placed at risk.