What Is Earnest Money and Why It Gets Disputed
Earnest money—also called a good faith deposit—signals a buyer's serious intent and protects the seller from buyers who back out without justification. Typically 1–3% of the purchase price, earnest money is held in escrow by a title company or broker until closing, when it is applied to the purchase price. When a transaction falls apart, both sides often claim the deposit, and the resulting dispute can be contentious even for relatively modest amounts.
When Buyers Can Get Their Earnest Money Back
Most purchase contracts include contingencies that protect buyers. Common contingency types that allow buyers to walk and recover earnest money include: financing contingencies (if the buyer cannot obtain loan approval under specified terms); inspection contingencies (if the inspection reveals problems the seller won't fix); and appraisal contingencies (if the property appraises below the purchase price). A buyer who properly invokes an applicable contingency within the deadline has the right to terminate the contract and receive the full earnest money refund.
Disputes arise when: the buyer misses a contingency deadline; tries to back out after waiving contingencies; claims a financing contingency when they could have qualified for the loan; or characterizes a cold-feet termination as a contingency exercise. Sellers dispute these characterizations, and the escrow holder—typically a title company or broker—will not release the funds without agreement or a court order.
When Sellers Keep the Earnest Money
If a buyer breaches the contract without a valid contingency reason—simply changing their mind, making other plans, or declining to close without cause—the seller's typical remedy under a purchase contract is to retain the earnest money as liquidated damages. Most residential contracts include a specific liquidated damages clause making the earnest money the seller's exclusive remedy for buyer default, preventing the seller from also suing for additional damages.
However, if the seller's damages exceeded the earnest money and the contract does not include a liquidated damages clause, the seller may be able to sue the buyer for actual damages—the difference between the contract price and what the property later sold for, plus carrying costs and transaction fees.
How Disputes Are Resolved
Escrow holders typically require a written agreement from both parties or a court order before releasing disputed earnest money. Most residential contracts include mandatory mediation before litigation. Mediation is fast (usually resolved in one session) and costs $300–$600 each. If mediation fails, small claims court handles deposits under $10,000–$15,000 in most states without requiring an attorney. Larger disputes go to civil court and may involve attorney's fees awards if the contract includes a prevailing party clause.
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Frequently asked questions
What if I can't get a mortgage but my financing contingency deadline passed?
If you failed to invoke your financing contingency by the deadline specified in the contract, you may lose the earnest money even if you genuinely cannot qualify for the loan. Some courts have shown flexibility when the buyer acted promptly to inform the seller and the deadline was narrowly missed, but this is not reliable. Always calendar contingency deadlines and act before they expire.
Can a seller keep the earnest money AND sue the buyer for more?
Depends on the contract. If the contract contains a liquidated damages clause designating earnest money as the seller's exclusive remedy, the seller cannot also sue for additional damages. If the contract does not include this limitation, the seller may have both remedies. Review the specific contract language carefully.
How long does an earnest money dispute take to resolve?
Mediation, if included in the contract, typically takes 2–6 weeks to schedule and one half-day to complete. Many disputes resolve through attorney negotiations in 30–90 days without formal proceedings. Court litigation can take 6–18 months. The extended uncertainty of disputed funds sitting in escrow motivates both sides toward early resolution.