Earnest Money Disputes: What Your Contract Says and What It Means

8 December 2025

Buying or selling a home is an exciting journey, but it’s also full of legal and financial intricacies. One of the most common areas of confusion? Earnest money disputes.

You’ve probably heard about earnest money, that initial deposit meant to show the seller you’re serious about buying. But what happens when things don’t go as planned? Who gets to keep that money? The answer lies within your contract.

In this article, we’ll break down earnest money disputes, explain what your real estate contract says about them, and help you navigate these tricky situations with confidence.

What Is Earnest Money?

Before we dive into disputes, let’s quickly define earnest money.

When you make an offer on a home, you typically put down a deposit known as earnest money—usually 1% to 3% of the purchase price. This money reassures the seller that you’re serious about the transaction. If everything goes smoothly, the earnest money eventually goes towards your down payment or closing costs.

But if the deal falls apart? That’s where things can get messy.

Common Causes of Earnest Money Disputes

Earnest money disputes usually arise when a real estate transaction fails to close. The big question? Who gets the earnest money—the buyer or the seller?

Here are some common reasons these disputes happen:

1. Buyer Backs Out Without a Valid Reason

If a buyer suddenly decides to walk away for personal reasons that aren't covered in the contract, they typically lose their earnest money. The seller keeps it as compensation for taking the property off the market.

2. Missed Deadlines

Contracts often have deadlines for inspections, financing approvals, and other contingencies. If a buyer fails to meet these deadlines, they may forfeit their earnest money.

3. Financing Falls Through

Most contracts include a financing contingency, protecting buyers if they can’t get a loan. However, if the buyer waived this contingency and their financing collapses, they might have to kiss that deposit goodbye.

4. Issues Found During the Inspection

A home inspection can reveal serious problems. If the contract allows the buyer to walk away due to inspection findings, they’re usually entitled to a refund. But if the buyer misses the deadline to back out, the seller may claim the earnest money.

5. Contract Contingency Confusion

Many contracts include contingencies (like home sale contingencies or appraisal contingencies). If a buyer and seller disagree on whether a contingency applies, an earnest money dispute can arise.

What Your Contract Says About Earnest Money Disputes

The purchase contract is the ultimate authority on what happens to earnest money. It includes specific terms and conditions that dictate when a buyer can rightfully get their deposit back or when a seller is entitled to keep it.

Key Contract Clauses to Focus On

1. Contingencies

- These are conditions that must be met for the transaction to move forward.
- Common ones include financing, inspection, and appraisal contingencies.
- If a contractually valid contingency isn’t met, the buyer typically gets their earnest money back.

2. Deadline and Performance Expectations

- Buyers are usually required to meet specific deadlines for loan approval, inspections, and negotiations.
- Missing these timelines can result in losing the deposit.

3. Who Holds the Earnest Money?

- Typically, the earnest money is held by a neutral third party, such as a title company, escrow agent, or brokerage.
- This ensures that neither the buyer nor the seller has direct control over the funds.

4. Dispute Resolution Process

- The contract often defines how disputes will be handled.
- Many agreements include mediation or arbitration clauses to avoid lengthy legal battles.

How to Avoid Earnest Money Disputes

No one wants to end up in a tug-of-war over earnest money. Here’s how you can protect yourself from disputes:

For Buyers:

✅ Understand Your Contract – Know your contingencies and deadlines inside out.
✅ Stick to Deadlines – Don’t miss key dates for inspections, financing, or negotiations.
✅ Put Everything in Writing – If you want to cancel, do it formally and on time.
✅ Work with an Experienced Agent – A real estate professional ensures you stay on track.

For Sellers:

✅ Ensure a Strong Contract – Work with your agent to create a clear, enforceable agreement.
✅ Communicate Effectively – If issues arise, discuss them early and professionally.
✅ Be Mindful of Contingencies – Understand what can allow buyers to back out without penalty.

What to Do If You’re Involved in an Earnest Money Dispute

Sometimes, despite best efforts, disputes happen. If you find yourself in one, here’s what to do:

1. Review the Contract

Carefully read what the contract says about earnest money. If you’re unsure, consult a real estate attorney.

2. Try to Negotiate

If both parties are open to discussion, you may be able to reach a compromise without legal action.

3. Mediation or Arbitration

Many contracts require disputes to go through mediation or arbitration before legal action. This can be a faster, less expensive alternative to court.

4. Legal Action (Last Resort)

If all else fails, it may be necessary to go to court, although legal battles can be costly and time-consuming.

The Bottom Line

Earnest money disputes can be frustrating, but they are avoidable when buyers and sellers understand their contracts. The best way to protect yourself is to thoroughly review the earnest money terms, stick to deadlines, and seek professional guidance when needed.

At the end of the day, clarity is key—the more you understand your contract, the fewer surprises you’ll encounter. So, whether you're buying or selling, approach earnest money with confidence and keep moving forward on your real estate journey!