In a sales contract there is the concept of “consideration.” Consideration is a contribution by both parties, usually with a cash deposit by the buyer, which seals the contract and the deal moves forward. This cash deposit, called the earnest money deposit is held by a third party and credited to theearnest money deposits buyer’s closing costs at the settlement table.

Yet as everyone knows, not every sale is led to a successful conclusion. Deals fall out. So what happens to the buyer’s earnest money deposit when a deal goes south?

That depends upon why the transaction fell through. A buyer who simply acquired a terrible case of buyer’s remorse and wanted out of the deal for no legitimate reason will be in danger of losing the earnest money. If the buyer wanted out of the deal badly enough, well, that’s the price to pay. Many contracts today however have an “option” period where the buyer pays the seller a small fee to back out for any reason within a relatively short period of time, say five days. The buyer loses the fee, but gets the earnest money back.

Earnest money can also be returned if undisclosed issues with the property are found upon inspection. If there was something wrong with the property that needs repair or affects the value of the home, the buyer can typically cancel the contract and receive the earnest money refund. Another common reason earnest money is refunded is when the property doesn’t appraise for at least the agreed upon sales price. In such an instance, the buyer and seller have the option of renegotiating the price but if a new agreement can’t be produced, the sales contract has language allowing the buyer to receive the entire earnest money back.

The sales contract will spell out the circumstances in which a buyer can cancel the contract and what happens if a cancellation request does in fact occur. As long as there is a legitimate reason for the buyer to give pause or the property isn’t as advertised, the earnest money is typically refunded without pause.