If a buyer breaches the contract, what typically happens to the earnest money under the contract terms?

• A. It is automatically kept by the broker
• B. It is returned to the buyer
• C. It is disbursed according to the contract terms, which may apply to damages or be refunded
• D. It is donated to charity

Answer: (C)

Earnest money is a deposit held in escrow to show the buyer’s commitment and to protect the seller if a party defaults. When a buyer breaches, there isn’t a universal rule for what happens to that money; the contract itself dictates the outcome. The agreement and the escrow instructions spell out how the funds are to be disbursed—often as the seller’s damages if the contract allows, or refunded to the buyer if the breach triggers a provision that returns the funds, or if the contract is terminated under a contingency or mutual release. If a dispute arises, the escrow holder will follow the contract or a court/arbitration decision before releasing any funds. The key idea is that the earnest money is distributed according to the contract terms, which may apply to damages or to a refund.