How earnest money is held
Earnest money is a good-faith deposit the buyer makes after an offer is accepted. It's usually held by a neutral third party, such as a title company, settlement attorney or brokerage, in an escrow or trust account. At closing, it typically goes toward the buyer's down payment or closing costs.
The escrow holder can't simply pick a side. They follow the contract and the law.
What the contract usually says
Most purchase contracts spell out when a buyer can cancel and get the deposit back. Common reasons include a failed inspection, a low appraisal or a loan that isn't approved, as long as the buyer acts within the contingency deadlines.
If the buyer backs out for a reason the contract doesn't allow, or misses a deadline, the seller may be entitled to keep the deposit. Some contracts treat the deposit as the seller's main remedy if the buyer defaults.
Why disputes happen
- A buyer cancels just after a contingency deadline passed
- Notice of cancellation wasn't given in writing or in the required form
- The parties disagree about whether a repair request was reasonable
- A buyer's loan fell through because of something within their control
- The contract language is unclear
How disputes get resolved
Often, the agents and parties work it out and sign a release, sometimes splitting the deposit. If not, many contracts call for mediation, where a neutral person helps both sides reach an agreement.
If that fails, the matter may go to arbitration or small claims or other court. In some places, the escrow holder can hand the funds to a court and let a judge decide. Rules vary by state, so ask a real estate attorney about yours.
How to avoid a dispute
- Read the contract before you sign, especially the contingency section
- Put key deadlines on a calendar and track them closely
- Send any notice in writing, the way the contract requires
- Keep records of inspections, lender letters and emails
- Ask your agent questions early, before a deadline passes
When to get help
For a large deposit or a contract that isn't clear, a real estate attorney can review your options. Your agent can explain how disputes are usually handled in your area. If you're buying, a full pre-approval before you make an offer lowers the chance that financing problems put your deposit at risk.
