Your earnest money usually comes back if you cancel under a contingency, on time and in writing. Here is when the seller can keep it, and how to protect the deposit before you sign.
Earnest money is the deposit you put down when a seller accepts your offer, and whether it comes back depends almost entirely on what your purchase contract says. If you cancel under a contingency, on time and with the notice the contract requires, the money is generally refundable. If you walk away for a reason the contract does not cover, the seller may have the right to keep it.
What Is Earnest Money and How Much Is It?
Earnest money is a good faith deposit a buyer pays to show the seller the offer is serious. It is usually paid shortly after the purchase agreement is signed, and a seller who receives no deposit may question whether the buyer intends to close. The contract can write the amount as a flat dollar figure or as a percentage of the price. In California, for example, deposits commonly run 1% to 3% of the sales price. Norms differ from one market to another, so ask your agent what is typical where you are shopping.
A larger deposit can make an offer more attractive to a seller, especially in a competitive market, but it also puts more of your cash at stake. Our guide to what to do before you make an offer on a house covers how to shape your offer and its terms.
Where Is the Deposit Held Until Closing?
Not in the seller’s pocket. Once paid, the money sits in an escrow account run by a neutral third party until closing. At closing, it is credited toward the purchase price, which reduces the cash you need to bring that day. Your Closing Disclosure shows how your deposit and other credits reduce your cash to close, and CFPB rules require that form to reflect the actual terms and actual settlement costs of the transaction. Compare the deposit line against your own records, and raise any mismatch with your settlement agent right away. Our guide to the Loan Estimate and Closing Disclosure explains both forms in detail.
When Do You Get Your Earnest Money Back?
When a contingency in your contract fails and you cancel the right way. A contingency is a condition that must be met within a set period, and it gives you a defined window to back out without penalty. Say your contract gives you 18 days from acceptance to complete inspections, and the inspectors find problems you are not willing to take on. If you cancel within that 18-day window and follow the contract’s notice requirements, the deposit is generally refundable.
| Contingency | When it can bring your deposit back |
|---|---|
| Financing | You cannot obtain a loan within the contract’s period |
| Inspection | Inspections turn up problems you will not accept |
| Appraisal | The home appraises below the agreed price |
| Home sale | Your current home does not sell within the set period |
When Can the Seller Keep It?
When you default rather than validly cancel. That happens most often in three ways. First, you miss a contingency deadline, because once the period expires, the protection ends with it. Second, you fail to give notice the way the contract requires; a buyer who misses the cancellation deadline or skips the required written notice may lose the refund even when the underlying problem, such as a poor inspection, was legitimate. Third, you remove your contingencies and then change your mind. Once you sign off on removing them, backing out puts the deposit at risk, and the contract’s default provisions determine whether the seller may keep it.
Careful
Missing a contingency deadline, or canceling without the written notice the contract requires, can cost you the refund even when the underlying problem is real. Calendar every date and send each notice exactly the way the contract spells out.
What If You Back Out for a Reason Not in the Contract?
A contingency is not an open-ended right to walk away, and buyer’s remorse is not one of them. If no contract clause covers your reason for canceling, you are asking the seller to voluntarily release the deposit, and the seller may refuse.
When buyers and sellers dispute a deposit, dispute procedures vary by state. In Florida, for instance, a licensed broker who is holding disputed funds must notify the state real estate commission and then use one of the resolution processes the state allows. Many disputes end with a negotiated release that both parties sign; others go to mediation or court. One more caution: state law generally requires land sale contracts to be written and signed by the party being held to them, so a verbal side agreement about the deposit may carry no legal weight. Get any compromise in writing, and talk to a real estate attorney if a contested deposit is substantial.
Does the Three-Day Cooling-Off Rule Apply?
No. The FTC’s Cooling-Off Rule lets you cancel certain kinds of sales within three days, but it applies only to sales made in settings such as your home or a seller’s temporary sales location. Sales that are completed at the seller’s regular place of business fall outside the rule, and that is where a typical home purchase happens. Do not count on a three-day window to change your mind without penalty.
How Do You Protect Your Deposit Before You Sign?
- Read the contingency language closely: what each clause covers, how long it lasts, and what notice it demands.
- Calendar every deadline the day you sign, with reminders a few days ahead.
- Put all notices and agreements in writing, even friendly ones.
- Do not remove contingencies until each condition is actually satisfied.
- Get pre-approved before you shop, so a financing failure is less likely in the first place. Our guide to getting pre-approved for a mortgage walks through the steps.
Related guides
- Before You Make an Offer on a House: how to prepare your offer and its terms before any deposit changes hands.
- How Much Cash Do You Need to Close on a House?: how your deposit fits into the total you bring on closing day.
- Getting Pre-Approved for a Mortgage, Step by Step: reduce the risk that a financing contingency is what sinks the deal.
The short version
- Earnest money is a good faith deposit, usually paid after the purchase agreement is signed, and it is held in escrow until closing.
- If a contingency fails and you cancel within the contract’s deadline with proper written notice, the deposit is generally refundable.
- Missing a contingency deadline, skipping required notice, or removing contingencies and then backing out can let the seller keep the deposit.
- The FTC’s Cooling-Off Rule does not give you three days to cancel a home purchase.
- State rules on disputed deposits vary, so get any compromise with the seller in writing and ask a real estate attorney about a contested refund.
Readers also ask
Is earnest money refundable?
Generally yes, if you act in good faith and cancel under a contingency that is still in place, within the contract’s deadline and notice requirements. Once contingencies are removed or the deadline passes, the deposit is at risk.
How much earnest money is normal?
The contract can set a flat dollar amount or a percentage of the price. In California, deposits commonly run 1% to 3% of the sales price, and norms vary by market.
Where does earnest money go if the sale closes?
It sits in an escrow account until closing, then is credited toward the purchase price, reducing the cash you bring to the closing table.
What happens if the buyer and seller both claim the deposit?
Dispute procedures vary by state. Many disagreements end in a written release both parties sign or in mediation or court.
This guide is general information about U.S. mortgages, not financial, tax or legal advice. Loan terms depend on the lender and on your credit, income and property, so confirm the details with your lender, and see consumerfinance.gov for official guidance.
