Understanding Earnest Money—and When You Could Lose It
An earnest money deposit is the amount a buyer puts down to show they’re serious about purchasing a home. In most areas, this is a percentage of the purchase price and is held in an escrow or title company account until closing. If the sale moves forward as planned, the earnest money is applied toward the buyer’s down payment and closing costs.
While earnest money is meant to protect both parties, there are situations where a buyer can lose it. Understanding these scenarios helps buyers make confident, informed decisions during the transaction.
1. Waiving Contract Contingencies
In competitive markets, some buyers waive contingencies—such as financing or inspection—to make their offer more appealing. But doing so carries significant risk.
Financing contingency: Protects the buyer if their mortgage falls through. Without it, a buyer who can’t secure financing may forfeit their earnest money.
Inspection contingency: Allows buyers to renegotiate or request repairs if major issues are found. Waiving it removes that protection. Most professionals advise against waiving the inspection contingency unless the buyer plans to remodel extensively or tear the home down.
Waiving contingencies can strengthen an offer, but buyers must be absolutely certain they can follow through.
2. Missing Contract Deadlines
Purchase agreements outline specific timelines for inspections, financing approval, document submission, and closing. If a buyer fails to meet these deadlines without a valid reason, the seller may have the right to cancel the contract and keep the earnest money.
Most sellers are flexible when delays are caused by lenders or other unavoidable circumstances, as long as the buyer is acting in good faith. Still, staying on top of deadlines is essential.
3. Backing Out Without a Valid Reason
If a buyer simply changes their mind—without a contingency to protect them—the earnest money is typically forfeited. Sellers take their home off the market once they accept an offer, and the deposit compensates them for lost time and potential missed opportunities.
Earnest money is designed to show commitment. Walking away late in the process without cause usually means the seller keeps the deposit.