Wondering about the disposition of earnest money in a real estate transaction? It’s all governed by the contract.

Q: We are selling our home, and the buyer just canceled the contract stating he was denied for a mortgage loan. Do we have to give the deposit back?

— Christine

A: One of my favorite sayings is that contracts have consequences. When a seller and buyer agree on the terms of a home sale those terms are binding. The buyer will put up an earnest money deposit, and if that buyer later breaks the contract, the seller will get to keep that deposit. The deposit represents an agreed amount to the seller to compensate for the time and expenses of going through with the failed attempt.

Because there are so many unknowns for a buyer going into a purchase, the contract will allow for certain “contingencies” or factors that will enable the buyer to cancel the contract and get the deposit back.

The two most common contingencies relate to the properties condition, allowing a certain amount of time for inspections, and the buyer’s ability to get a loan approved, again, within a certain time frame.

If the contract contains these contingencies and the property is in unexpectedly poor condition, or the buyer cannot get approved for a loan, despite diligent efforts to do so, the deposit will have to be returned to the buyer.

Usually, this works out just fine, and the property is sold. Occasionally a problem occurs, the buyer notifies the seller by the deadline, and the contract is canceled. Unfortunately, once in a while, a qualified buyer will want to get out of the contract without losing the deposit and will manufacture an issue to get the loan denied.

This is usually done by withholding necessary information from the lender.

Because of this, standard contracts contain a clause requiring that the buyer fully cooperates with the lender at the risk of losing the deposit.

The first thing you need to do is carefully read the financing section of your contract to see what the deadline was and what the buyer was required to do.

Once you have done that, you need to find out why the buyer’s loan was denied making sure that it was not done purposefully. If the buyer was denied despite his best efforts and notified you by the deadline for doing so, you will need to return the deposit.

However, if the deadline was missed, or if it appears the denial was manufactured, you will have a claim for the money.

Gary M. Singer is a Florida attorney and board-certified as an expert in real estate law by the Florida Bar. He practices real estate, business litigation and contract law from his office in Sunrise, Fla. Send him questions online at or follow him on Twitter @GarySingerLaw.