How does earnest money function in terms of buyer default?

Earnest money serves as a demonstration of the buyer's good faith and commitment to completing the purchase of a property. It is typically a deposit made when making an offer on a property to show the seller that the buyer is serious about the transaction.

In instances where the buyer defaults, earnest money is generally forfeited to the seller as a form of compensation for the time and opportunity lost while the property was off the market. This means that should the buyer back out of the deal without a valid reason as outlined in the purchase agreement, the seller can claim the earnest money. This action helps offset some of the costs and potential losses incurred due to the buyer's withdrawal from the transaction.

While buyers may negotiate terms concerning the return of their earnest money under specific circumstances, such as contingencies outlined in the contract (like financing or inspection contingencies), the standard practice is that failure to comply with the agreement usually leads to the forfeiture of the earnest money. This provides a layer of assurance for sellers that they have some recourse if the buyer does not fulfill their obligations.