Who Keeps the Earnest Money Deposit if a Massachusetts Home Purchase Falls Through?

In Massachusetts, signing a Purchase and Sale (P&S) agreement requires the buyer to put down a substantial earnest money deposit, typically 5% of the total purchase price. For a $600,000 home in Boston, Springfield, or Lowell, that means $30,000 is locked in an escrow account. If the deal successfully reaches the closing table, that money is simply applied to the buyer's down payment. But what happens when the deal falls apart?

Disputes over who gets to keep the earnest money are some of the most bitter battles in real estate law. Sellers feel they are owed the money because their house was taken off the market, while buyers desperately need those funds back to buy a different home. The resolution relies entirely on the exact language within the contract and strict state escrow rules. A local real estate attorney from our directory can fiercely protect your deposit or help you legally seize it from a defaulting party.

How Deposit Disputes Unfold in Massachusetts

In Massachusetts, the deposit is usually held by the seller's real estate brokerage or the seller's closing attorney in a non-interest-bearing escrow account. The escrow agent cannot simply decide who is right; they must follow strict legal procedures.

Failed Home Inspections

If the buyer includes an inspection contingency in their initial offer, they have a set window (usually 5 to 7 days) to conduct a professional home inspection. If the inspector finds major issues, such as a cracked foundation or a failing roof, the buyer can terminate the agreement. As long as the buyer's attorney sends a formal written notice of cancellation before the deadline expires, the contract is voided, and the buyer is legally entitled to a full and immediate refund of their earnest money.

Denied Mortgage Financing (Commitment Date Expiration)

Most standard contracts, like Form RA151, Massachusetts, Greater Boston Real Estate Board, Standard Form Purchase and Sale Agreement, contain a mortgage contingency clause. This gives the buyer until a specific "Commitment Date" to secure a firm loan approval from a bank. If the buyer loses their job or the home fails to appraise, the bank will deny the loan. If the buyer's attorney notifies the seller in writing before the Commitment Date passes, the deposit is refunded. However, if the buyer misses this critical deadline by even one day and their loan is subsequently denied, they lose their deposit.

Buyer Remorse & Liquidated Damages Clauses

What if a buyer simply wakes up and decides they no longer want the house? Under Massachusetts law, if a buyer breaches the contract without a valid contingency, the seller is entitled to keep the deposit. Almost all P&S agreements contain a "Liquidated Damages" clause. As confirmed by the Massachusetts Supreme Judicial Court in the landmark case Kelly v. Marx, 428 Mass. 877 (MA Supreme Judicial Court 1999), this clause means the deposit serves as the sole financial penalty for the buyer. The seller gets to keep the 5% deposit, but they cannot sue the buyer for further financial damages, even if the seller ultimately has to sell the home to someone else for a much lower price.

The Interpleader Process for Escrow Agents

When a deal collapses and both the buyer and seller refuse to sign a mutual release form, the money becomes trapped. By law, the real estate broker or attorney holding the escrow cannot release the money to either side without a mutual agreement or a court order. To avoid being sued personally, the escrow agent will file an "Interpleader" action in a court, such as the Worcester County Superior Court, Worcester. This legal action effectively hands the $30,000 over to the court, and the judge determines who legally breached the contract and deserves the funds.

The Costs of Fighting for a Deposit

Fighting over an earnest money deposit involves weighing legal fees against the trapped amount:

• Small Claims Court: If the deposit is $7,000 or less, the dispute can be handled in a Massachusetts Small Claims Court. Filing fees are generally under $150, and attorneys are not required.
• District or Superior Court: For typical 5% deposits (often $20,000 to $50,000), civil litigation is required. Real estate litigators charge between $300 and $600 per hour. If a case goes all the way to trial, legal fees can quickly exceed $10,000.
• Attorney Fees Clause: Check your P&S agreement. Many standard MA contracts dictate that the "prevailing party" in a deposit lawsuit is entitled to have their attorney's fees paid by the losing party.

How Long Does it Take to Get the Money Back?

If the cancellation is clearly valid (like a failed inspection done on time), the seller usually signs the release form within 48 hours, and the escrow agent cuts a check the next day. However, if the seller disputes the cancellation out of anger or spite, the funds will be frozen. Filing an interpleader and litigating the breach of contract in court can trap the money for 6 to 12 months, preventing the buyer from using those funds to buy a different home.

Common Deposit Dispute Scenarios

Frequently Asked Questions (FAQ)