Understanding Earnest Money

Unfortunately, there are several situations where a buyer may need to cancel the contract at any point in the purchasing process. We often have sellers ask us if there are any earnest money repercussions.

Below is a breakdown of potential cancellation reasons. Please note that this is not a clear cut process & we often find ourselves in grey areas. The release of any earnest money deposit requires the signatures of both the seller & the buyer. Therefore, when in doubt, you should seek counsel from your agent & attorney.

Seller typically CAN fight to retain earnest money:

• Buyer cancels contract after the attorney review & inspection periods without citing any contingencies (e.g., mortgage contingency)

Seller typically CANNOT fight to retain earnest money:

• Buyer cancels contract during attorney review period, due to the contract or condition of the property 
• Buyer cancels contract during condo document review period, due to the conditions or health of the HOA (if part of an association)
• Buyer cannot obtain mortgage due to good faith reasons cited by the lender, such as:
  • Major change in buyer’s financial circumstances (e.g., job loss)
  • Low appraisal/appraisal issues
• Buyer requests mortgage extension & seller denies 

As you can see, it is very difficult (as a seller) to retain earnest money. However, earnest money is there to show you that the buyer is willing to put some skin in the game & provides the buyer with incentive to act in good faith throughout the transaction.

Next Up » Preparing for the Inspection