What Happens to Earnest Money if the House-Purchase Contract Is Broken?

by Laura Jerpi, Demand Media

    When you sign a contract to purchase property, it is typically accompanied by an earnest money deposit. The amount of the deposit varies according to each transaction, but is generally a very small percentage of the purchase price. Paying an earnest money deposit is a way for you to show the seller that you seriously intend to purchase the property in good faith, because if the deal doesn't go through, you may not get your money back.

    Process

    The earnest money check is kept in a trust by the real estate broker for the buyer or the title company. If the buyer goes through with the sale, the earnest money is applied to the sale. For example, if you made a $3,000 earnest money deposit, this would later be subtracted from the amount you owe at closing.

    General Rule

    It is generally assumed that the buyer gets the earnest money deposit back if the contract purchase is broken through no fault of her own, and that the seller keeps the deposit if the buyer fails to meet her end of the agreement. These terms must be written into the sales contract and agreed upon by both parties to be valid.

    Who Gets the Earnest Money?

    If the seller backs out of the contract, the buyer typically gets her earnest money back. If the buyer backs out, who gets the earnest money depends on whether the buyer has a valid reason for backing out of the deal. For example, a buyer would likely get her money back if she discovered a serious flaw in the property during a home inspection that the seller hadn't known about or disclosed. On the other hand, the seller would likely keep the deposit if the buyer simply changed her mind.

    Legal Action

    If both parties believe they are entitled to the earnest money deposit, the matter can be taken to court. The real estate broker can take the matter to court himself, with himself as the plaintiff and the buyer and the seller as the defendants, if he wants to get the money out of his escrow account quickly. If he doesn't wish to do this, the buyer or seller can take the other party to court and a judge will decide who keeps the earnest money deposit. Either way, the deposit cannot be taken out of escrow until a judge rules on it.

    About the Author

    Laura Jerpi has been working in marketing since 2007. She is an interactive copywriter who writes for Thought Leadership Publications, Ai InSite and South Source. Jerpi holds a Bachelor of Arts in communications from the University of Pittsburgh and a Master of Business Administration from Robert Morris University.