Earnest Money Disputes: When Buyers and Sellers Can Keep the Deposit

Most offers include an earnest money deposit. But if the deal falls apart, who keeps it? Use this FSBO guide to understand when buyers get refunds, when sellers may keep the deposit, and how to avoid disputes.

🔍 What Triggers an Earnest Money Dispute?

Disputes usually happen when a party cancels and both sides disagree on whether a valid contract contingency applies. Common flashpoints:

  • Missed inspection or repair deadlines
  • Unclear financing or proof-of-funds timelines
  • Low appraisal without an appraisal contingency or gap clause
  • “As Is” misunderstanding vs. duty to disclose latent defects

⚖️ Who Keeps the Deposit?

Buyer usually gets a refund if they cancel within a valid contingency period and follow the contract’s notice rules. Seller may keep the deposit if the buyer defaults without a protected reason or misses a required deadline.

Quick examples

  • Refunded to Buyer: Buyer cancels during inspection window due to significant findings. See inspections & repairs.
  • Refunded to Buyer: Financing denial within the financing contingency period.
  • Released to Seller: Buyer backs out after all contingencies are waived/expired.
  • Released to Seller: Buyer misses earnest money delivery or response deadlines stated in the contract.

🧩 “As Is” vs. Disclosure: How They Affect Deposits

“As Is” means you’re not agreeing to make repairs, but it doesn’t remove your duty to disclose known defects. Buyers can still cancel within contingency timelines in an As-Is sale. If a buyer cancels without a valid contingency or after the deadline, the seller may claim the deposit.

🛡️ FSBO Best Practices to Avoid Disputes

  • Use a neutral escrow/title company to hold funds until closing.
  • Spell out deadlines (inspection, appraisal, financing) in the contract and calendar them.
  • Respond in writing to repair requests and keep a simple paper trail.
  • Consider credits instead of repairs to keep timelines intact. See inspection/repair guide.
  • Know your bottom line by understanding who pays closing costs.
  • Communicate directly — buyers and agents contact you for updates and documents.

🧭 If There’s a Dispute, What Happens?

Escrow holders typically won’t release funds without mutual instructions or a court order. Many contracts require mediation or arbitration before litigation. Clear timelines and written notices are your best protection.

Tip: When in doubt, ask escrow to outline their disbursement policy upfront, so everyone knows the procedure.