When can a seller legally keep the earnest money deposit?

The seller can legally keep the earnest money deposit if the transaction does not proceed due to the buyer’s actions. This is based on the principle that earnest money serves as a sign of good faith from the buyer and indicates their commitment to the transaction. If the buyer acts in a way that leads to the failure of the deal—such as backing out of the agreement without a valid reason as defined in the purchase contract—the seller is typically entitled to retain the earnest money as compensation for the time and resources they've invested in the transaction.

In real estate transactions, the specific conditions regarding the handling of earnest money deposits should be outlined in the sales agreement. If the buyer violates the terms, such as failing to follow through on agreed actions or contingencies, the seller has grounds to retain the deposit. This is a protective measure that ensures sellers are not left at a disadvantage when a buyer withdraws without justification.