Mortgages & Home Loans Homeowner Guide Selling Your Home Can a Seller Keep a Buyer's House Deposit? Keeping a buyer's deposit could be a legal, yet unwise choice By Elizabeth Weintraub Updated on August 20, 2021 Reviewed by JeFreda R. Brown Reviewed by JeFreda R. Brown JeFreda R. Brown is a financial consultant, Certified Financial Education Instructor, and researcher who has assisted thousands of clients over a more than two-decade career. She is the CEO of Xaris Financial Enterprises and a course facilitator for Cornell University. learn about our financial review board In This Article View All In This Article Emotions and the Transaction How a Buyer Can Get Earnest Money Deposit Refunded When the Earnest Money Deposit Is at Risk Frequently Asked Questions (FAQs) Photo: Westend61 / Getty Images Even though a home seller might have a legitimate reason and right to demand a buyer's earnest money deposit in the event that a buyer defaults, exercising that right might not be in the seller's best interest. Key Takeaways There may be some situations in which a seller is entitled to a buyer's earnest money, but exercising that right might not be the best option.When a buyer cancels the transaction, they usually have a contingency period in the contract giving them that right.A seller should always get legal advice before making a decision about the escrow deposit. Emotions and the Transaction Let's start with the emotional aspects of the transaction. Typically, in any given real estate transaction, it is not the seller who feels wronged during the purchase period. Generally, it is the buyer. The seller is simply hoping the transaction will conclude upon receipt of a huge sum of money deposited into their bank account. The buyer, on the other hand, is suspicious of a rip-off and wonders whether the seller is withholding hidden defects. Note It is generally the buyer who feels there is more at stake, which tends to add an intense emotional element to the transaction that the seller does not possess, up to the point in time when the buyer cannot close the sale. The underlying insecurities harbored by the buyer—coupled with the buyer's own smoldering anger over not closing—can develop into an explosive situation, heightened when the seller joins the fireworks by claiming that the buyer now owes them the earnest money deposit. The seller can't really force the buyer to close escrow. Many purchase contracts, especially those used in states such as California, contain a liquidated damages clause, which states that the seller is only entitled to the earnest money deposit up to a certain percentage of the sales price. Any excess money on deposit is generally returned to the buyer. How a Buyer Can Get Their Earnest Money Deposit Refunded Buyers who are canceling the transaction generally have some sort of contingency period in the contract that gives them the legal right to cancel the contract. It could be a loan contingency, an appraisal contingency, or an inspection contingency. It may be contingent on the buyer selling another home that the buyer can't seem to sell. Many contracts contain contingencies that allow the buyer to cancel under certain circumstances. For example, suppose the buyer hires a professional to conduct a home inspection. During the home inspection period, the buyer discovers that the furnace is inoperable, and the home inspector says that it is beyond its useful life. The buyer might ask the seller to replace the furnace. The seller could refuse and tell the buyer to cancel the deal. In such a situation, the buyer might be entitled to receive the earnest money back upon cancellation, but it doesn't mean that they will want to release the deposit. If the deposit is held by a third party, such as a title company or escrow company, all parties generally need to agree on its disposition or at least agree to cancel. If both parties are unreasonable, the transaction could be placed on hold, depending on state laws. In California, a seller cannot unreasonably withhold a refundable earnest money deposit, or they could face a fine. When the Earnest Money Deposit Is at Risk To take the disposition of the earnest money deposit once step further, suppose the buyer has exhausted all contingencies and released all of the contingencies. A few days before closing, perhaps the buyer gets cold feet and decides to cancel. The seller, who might be outraged by this turn of events, would probably have a right to expect to receive the buyer's earnest money deposit, since the buyer willfully and deliberately failed to close escrow. What if the buyer refuses to give the earnest money deposit to the seller? The buyer could make life difficult and refuse to sign any type of cancellation. The seller might be prohibited from selling the property to another buyer while still under contract with the existing buyer. The seller generally cannot have two contracts at one time, unless one contract is contingent on the cancellation of the other. Note Remaining in contract with a stubborn buyer could tie the seller's hands. The seller could probably file a case in small claims court and fight the buyer, but even with all of the facts seemingly on the seller's side, a judge could still award the money to the buyer. The law is not always black and white. How much time and money would be lost trying to obtain the earnest money deposit? If the seller doesn't care how long it takes to sell the home, and is willing to invest time and money to fight for the deposit, then it might be worth pursuing. That is why a seller should always get legal advice before making a decision about the escrow deposit. A seller can be in the right, yet still lose. Frequently Asked Questions (FAQs) How much is an earnest money deposit? Earnest money deposits are typically between 1% and 5% of the sales price, but it depends on the region and the type of market. During seller's markets, when many buyers are fighting over a smaller number homes, the typical deposit amount will increase. Where does the earnest money deposit go at closing? The earnest money deposit is typically applied to the down payment once the sale has closed. That means the buyer doesn't get the money back, but it will reduce the amount of money the buyer needs to pay at closing. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. FindLaw. "California Code, Civil Code - CIV § 1675." Balboa Real Estate. "Is the Earnest Money Deposit Refundable in California?" Gonchar Real Estate. "Sending Out Multiple Contracts of Sale to Two or More Purchasers."