Earnest money, equitable title, and contingencies

Deposit, ownership interest, and conditions

Earnest money is a good-faith deposit made under a purchase contract. It is held and disbursed under the agreement rather than becoming the seller's money merely because an offer is accepted. It normally becomes a credit toward the buyer's closing obligations. Earnest money is distinct from the full down payment, and a deposit alone does not create a binding sale or transfer title. Mutual promises can supply consideration for a purchase contract.

Under the general doctrine of equitable conversion, a buyer under an enforceable purchase contract acquires an equitable interest: a right to acquire legal title through performance. The seller retains legal title until conveyance. Equitable title is not a deed, immediate possession, or permission to alter the property. Possession is governed separately by the agreement.

Contingencies control the path

A contingency makes a contractual obligation depend on a stated event. Financing, appraisal, inspection, title review, and sale of the buyer's existing home are common examples. A financing contingency concerns obtaining the financing specified; an appraisal contingency concerns value. Loan prequalification is not a substitute for either protection. Inspection access alone does not create an unrestricted cancellation right.

Read each clause for the event, deadline, required efforts, notice, and consequences. A failed contingency can permit termination and an earnest-money refund when the buyer satisfies the clause. Some clauses provide automatic termination; others require an election and timely notice. A beneficiary may be able to waive a protection, but cannot assume an extension or change without the agreement required by the contract. A waived or expired protection can leave the buyer obligated to close.

Completion, protected exit, or default

At closing, earnest money is credited as the contract directs. A proper contingency termination differs from buyer default. A seller's right to retain a deposit as liquidated damages depends on the contract and applicable law, not simply on the sale failing. Entitlement to money and the escrow process for releasing it are separate questions.

For a Texas example, TREC's resale contract provides that timely termination under a valid option returns earnest money while the option fee is not refunded. Its escrow paragraph applies earnest money first to the cash down payment, then buyer expenses, with excess refunded. Its default paragraph gives the seller alternative remedies, including termination and earnest money as liquidated damages. These are Texas contract provisions, not universal rules.

Actual rights depend on the signed agreement and applicable law; legal disputes belong with an attorney.