Reviewed by the Sky Escrow team, a California DFPI-licensed escrow company serving Los Angeles County.
Last updated: August 25, 2026
Whether an earnest money refund happens depends on two things: which party cancelled the deal, and whether an active contingency legally justified the cancellation. If the buyer backs out during a valid contingency period, the deposit is typically refunded. If the buyer cancels after removing contingencies with no legal basis, the seller may have a claim to it. If the seller defaults, the buyer typically gets the deposit back.
What Determines Whether Earnest Money Is Refunded or Forfeited?
Earnest money is not automatically the buyer’s or the seller’s — it belongs to whichever party the purchase contract and escrow instructions say it belongs to once a cancellation happens. Escrow does not make that judgment call independently.
Two questions typically decide the outcome:
- Who cancelled? Buyer-initiated cancellations are evaluated differently than seller-initiated cancellations or seller defaults.
- Was there an active, unremoved contingency that gave the cancelling party a contractual right to walk away? A timely cancellation inside a contingency period generally protects the buyer’s deposit. A cancellation after contingencies are removed generally does not.
What Is Earnest Moneyexplains how the deposit is calculated and held before a dispute ever arises.Escrow Contingencies Explainedwalks through inspection, loan, and appraisal contingency periods in more detail.
Common Scenarios: Who Typically Gets the Deposit?
Buyer Cancels Within an Active Contingency Period
If the buyer cancels in writing before a disclosed contingency deadline — for example, during the inspection, loan, or appraisal contingency period — the earnest money is typically refunded to the buyer. This is the most common and least disputed scenario, because the purchase agreement generally spells out this right explicitly.
Buyer Cancels After All Contingencies Are Removed, With No Legal Basis
Once contingencies have been removed (in writing, per the contract), the buyer is generally obligated to complete the purchase. If the buyer walks away at that point without a contractual justification, the seller may have a claim to the earnest money as liquidated damages, depending on what the purchase agreement specifies. This is where disputes most often arise.
Seller Default
If the seller fails to perform — for example, refusing to convey title, missing closing without cause, or breaching a material term of the contract — the buyer typically gets the earnest money deposit back and may have additional remedies available under the purchase contract, such as pursuing specific performance or damages.
California-Specific Considerations for LA County Transactions
In Los Angeles County transactions, the California Association of Realtors (C.A.R.) Residential Purchase Agreement is the form most commonly used, and it includes specific contingency timelines and a liquidated damages provision that buyers and sellers typically initial separately. The exact deposit amount at risk, and whether liquidated damages apply at all, depends on what was actually initialed in that specific contract — not on a general statewide rule.
Sky Escrow, as a California DFPI-licensed escrow company, holds earnest money deposits as a neutral third party throughout the transaction and disburses funds strictly according to the signed escrow instructions on file — never based on a verbal request from either side.California Department of Financial Protection and Innovationregulates escrow companies operating in California under the California Escrow Law.
Why Escrow Can’t Just Decide Who Gets the Money
Escrow holders are contractually and legally bound to neutrality. Even when one party is confident they are entitled to the deposit, escrow cannot release disputed earnest money without one of the following:
- Written mutual cancellation instructions signed by both buyer and seller specifying how the funds should be disbursed, or
- A court order or binding arbitration award directing the disbursement.
If buyer and seller disagree and cannot reach a signed mutual agreement, escrow generally holds the disputed funds and may, depending on the circumstances, file an interpleader action asking a court to decide who is entitled to them. This is also whyWhat If Escrow Falls Throughis worth reading — it covers the broader cancellation process beyond just the deposit.
Frequently Asked Questions
Do I automatically get my earnest money back if I cancel the deal?
Not automatically. You typically get it back only if you cancel in writing within an active, disclosed contingency period, or if the seller is the one in default.
Can a seller keep earnest money if a buyer just changes their mind?
If the buyer cancels after contingencies were removed and has no contractual justification, the seller may have a claim to the deposit as liquidated damages, depending on what the signed purchase agreement provides. For a residential purchase contract (1-4 units, buyer intends to occupy), Civil Code § 1675 caps liquidated damages at 3% of the purchase price, and Civil Code § 1677 requires the provision to be separately initialed by both parties to be valid — confirm applicability with a real estate attorney, since eligibility still depends on contract terms and property type.
What happens if the buyer and seller can’t agree on who gets the deposit?
Escrow stays neutral and cannot release the funds without written mutual instructions from both parties or a court/arbitration order. Disputed funds are typically held until one of those is provided.
Does escrow decide who is right in an earnest money dispute?
No. Escrow is not a decision-maker or mediator in a contract dispute — it is a neutral stakeholder that follows signed instructions or a legal order.
Is earnest money refundable if the seller backs out?
Generally, yes. If the seller defaults or cancels without a contractual right to do so, the buyer typically receives the earnest money back and may have additional contractual remedies available.
Contact Sky Escrow
Sky Escrow, Inc.
15760 Ventura Blvd, Suite 1050, Encino, CA 91436
Phone: (818) 712-0000 / (888) 891-0002
Email: info@skyescrow.com
Licensed by the California Department of Financial Protection and Innovation (DFPI). License No. 96DBO-214073. License status: Active.
This article is for general informational purposes and is not legal, financial, or tax advice. Earnest money outcomes depend on the specific language of your purchase agreement and escrow instructions; consult a real estate attorney for guidance on a specific dispute.
Next Step
If your transaction is heading toward a cancellation and you’re unsure where the earnest money stands, review your purchase agreement’s contingency and liquidated damages sections first, then contact your escrow officer before either side signs anything. Sky Escrow’s team can walk you through what your specific escrow instructions require before funds move in either direction.