Guide · Real Estate · Chicago

Earnest Money: When You Get It Back, and When You Lose It

Buyers forget about earnest money until something goes wrong. Then one question matters: is it coming back? The contract and the deadlines decide.

By Lincoln Square Law · 8-minute read

Earnest money is the deposit a buyer puts down to show the seller the offer is serious. In a typical Chicago-area home purchase it is a few percent of the price, sometimes more in a competitive market, and it is usually paid in one or two installments shortly after the offer is accepted. Most buyers forget about it once the check clears. Then something goes wrong: the inspection turns up a problem, the loan falls through, or the buyer changes plans. At that point only one question matters. Is the money coming back? The answer is almost never a matter of fairness. It is written in the contract and decided by its deadlines.

Who holds the money

Earnest money is not paid to the seller. It is held in escrow, most often by the listing broker or by a title company, until closing or until the parties direct otherwise. When a real estate broker holds it, the Real Estate License Act of 2000 and the rules adopted under it require the funds to be kept in a special escrow account and disbursed only as the law and the contract allow (225 ILCS 454, 68 Ill. Adm. Code 1450). A broker holding disputed earnest money generally cannot simply choose a side. Without a written direction signed by both parties or a court order, the funds usually stay where they are, and the escrowee may ask a court to decide who gets them.

That rule protects both sides, but it also means a dispute over earnest money rarely resolves itself. If the buyer and seller disagree, the money stays frozen until one of them gives up, they agree, or a court rules.

How much, and when it is paid

The amount of earnest money is negotiable. A larger deposit can make an offer more attractive to a seller, but it also increases what the buyer puts at risk if a deadline is missed. Many Chicago-area contracts split the deposit into an initial amount paid with the offer and a larger amount due after attorney review ends, which limits exposure during the period when the deal is least certain. New-construction contracts are different: builders often require substantially larger deposits and may be permitted to use them before closing, so the contract terms and any statutory protections should be reviewed closely before signing. Whatever the amount, confirm in writing who is holding it and when each installment is due, because a late installment can itself be treated as a default.

What protects a buyer’s deposit

A buyer’s right to get earnest money back comes from contract provisions that allow the buyer to terminate without being in default. The most common are:

• Attorney review. Chicago-area residential contracts typically give both sides a short period after acceptance for their attorneys to review and propose modifications. If the parties cannot agree on changes, the contract can be terminated and the earnest money returned.
• Inspection. The inspection contingency allows the buyer to inspect within a set period and, depending on the contract’s terms, to request repairs or credits or to terminate.
• Mortgage or financing. The financing contingency protects a buyer who cannot obtain the loan described in the contract by a stated date, provided the buyer gives notice in the way and within the time the contract requires.
• Appraisal, sale of the buyer’s home, or other contingencies the parties negotiated.

Illinois law adds a statutory right in one situation. If the seller’s disclosure report is delivered after the contract is signed and discloses a material defect, the buyer may terminate within five business days after receiving it and recover all earnest money (765 ILCS 77/40). If the seller never delivers the report before closing, the buyer also has a right to terminate (765 ILCS 77/55).

How deposits are lost

Buyers rarely lose earnest money because of a dramatic breach. They lose it because a date passed. Contingency periods are usually short and measured in days, and many contracts provide that if the buyer does not give written notice by the deadline, the contingency is waived. A buyer who is still waiting for a loan decision when the financing deadline arrives, and who does not send the required notice or obtain an extension in writing, may find that the protection has expired.

Once the contingencies have passed, a buyer who walks away is generally in default. Many residential contracts provide that the earnest money may be kept by the seller as liquidated damages in that event, while others preserve additional remedies. The specific language controls, and it should be read before the buyer signs, not after a problem arises.

Common ways deposits are put at risk include:

• Missing the inspection or financing notice deadline, or giving notice in a way the contract does not allow.
• Relying on an informal conversation or text message instead of written notice to the right people.
• Waiving a contingency during negotiations without appreciating what was given up.
• Changing jobs, taking on new debt, or otherwise affecting loan approval after the contract is signed.

When the seller is the one who backs out

Earnest money disputes are not always about buyers. If the seller refuses to close without a contractual right to do so, the buyer is generally entitled to the return of the earnest money and may have additional remedies under the contract, which can include seeking to enforce the sale. A seller who cannot deliver clear title, or who fails to complete required repairs the contract obligates the seller to make, may also be in breach. As with buyer defaults, the contract’s remedy provisions decide what happens next.

What to do when a deal is falling apart

• Find the deadlines. Identify every contingency date that has not yet passed and what notice each one requires.
• Send notice properly. Use the method, recipients, and timing the contract specifies, and keep proof of delivery. Many contracts allow notice to the other party’s attorney or broker by email. Some do not.
• Get extensions in writing. An oral assurance that “we’ll give you more time” does not extend a deadline.
• Document the reason. Keep the inspection report, lender correspondence, or other records that show why the contingency applies.
• Ask for a mutual release. When a deal ends, both sides usually sign a cancellation agreement directing the escrowee how to disburse the earnest money. Read it carefully, because it typically releases other claims as well.

If the parties cannot agree

When the escrowee will not release funds without both signatures and one side refuses to sign, the practical options are negotiation, a demand letter that lays out the contract terms, mediation, or a lawsuit. For smaller deposits, small claims court may be an option. Illinois small claims procedures apply to claims up to $10,000 (Ill. S. Ct. R. 281). Where the escrowee has deposited the funds with a court, the dispute proceeds there. Because litigation costs can quickly exceed the deposit, the most useful protection is the one applied before signing: understanding the contract’s contingencies and deadlines, and calendaring them the day the offer is accepted.

Timing checklist for buyers

• Read the earnest money, contingency, notice, and default provisions before you sign the offer.
• Confirm who holds the deposit and get a receipt.
• Calendar the attorney review, inspection, and financing deadlines immediately after acceptance.
• Stay in contact with your lender and ask early if the approval may be delayed.
• Give any termination or extension notice in writing, by the contract’s method, before the deadline.

Earnest money is usually returned or applied at closing without a second thought. When it is not, the outcome is almost always decided by a date and a notice. Getting those two things right is most of the protection.