Earnest Money in Massachusetts: What Happens If a Sale Falls Through

In Massachusetts, a buyer who cancels under a properly exercised contingency typically gets the earnest money back, while a buyer who walks away without one can lose it to the seller as liquidated damages. With a 5% total deposit described as typical, that can mean $42,000 at Jamaica Plain's 12-month median sale price of $840,000.

What happens to earnest money if a home sale falls through in Massachusetts?

Whether earnest money gets refunded in Massachusetts depends on why the deal fell apart and what the Purchase and Sale Agreement says. If a buyer cancels under a properly exercised contingency, such as inspection, financing, or appraisal, the deposit is typically returned. If a buyer walks away without a valid contingency, many Massachusetts Purchase and Sale Agreements let the seller keep the deposit as liquidated damages. The outcome comes down to the contract language, so anyone on either side should have an attorney review it before signing.

Key Takeaways

• Massachusetts earnest money usually comes in two stages: a smaller deposit with the Offer to Purchase and a larger one with the Purchase and Sale Agreement.
• A 5% total deposit is described as typical, but it's a convention, not a law, so both amounts are negotiable.
• A buyer who exercises a contingency correctly and within its deadline is generally entitled to the deposit back.
• If a buyer backs out without a valid contingency, a liquidated damages clause usually lets the seller keep the deposit, and courts generally enforce these clauses (Kelly v. Marx, 1999).
• When comparing offers, weigh deposit size and contingency structure alongside price.

How does earnest money work in a Massachusetts deal?

The buyer puts down a deposit that is held in escrow until the deal closes or ends. Earnest money in Massachusetts usually comes in two stages: a smaller deposit with the Offer to Purchase and a larger one when the Purchase and Sale Agreement is signed. Vetstein Law Group, a Massachusetts real estate law firm, describes a total deposit of 5% of the price as typical. That's a convention, not a law, so both amounts are negotiable.

The numbers add up. At Jamaica Plain's 12-month median sale price of $840,000, a 5% total deposit would be $42,000. At Roslindale's median multi-family price of $1,025,000, it would be $51,250 (MLS PIN via Repliers, September 2025 through August 2026). That is serious money sitting in escrow, and both sides should understand what happens to it before they sign.

In Massachusetts, the deposit is usually held by the listing broker or an attorney acting as escrow agent. Under the Board of Registration's regulations (254 CMR 3.00(10)), money paid to a broker to be held in a transaction must be deposited immediately in a bank escrow account unless the parties agree otherwise in writing; the broker has no claim to it and must account for and distribute it when the deal closes or ends. A salesperson can't hold client funds and must turn deposits over to the employing broker. What happens to a disputed deposit is set by the escrow terms in the contract, so read that paragraph. Massachusetts also requires an attorney to take a meaningful part in a financed closing, usually the lender's attorney. Sellers aren't required to hire their own, though many do, and a seller's own attorney is the right person to handle a deposit dispute.

When does the seller keep the earnest money?

It depends on the contingencies.

Most Massachusetts deals include contingencies for the home inspection, the buyer's financing, and sometimes the appraisal. The inspection contingency and its deadline usually live in the Offer to Purchase, while the mortgage contingency is typically carried into the Purchase and Sale Agreement. A buyer who exercises a contingency correctly and within the contract's deadline is generally entitled to the deposit back. That is the point of a contingency.

Outside of that, the picture changes. If a buyer gets cold feet, misses a deadline, or tries to back out after a contingency has expired, a liquidated damages clause usually controls. The common form of the clause says the seller keeps the deposit as liquidated damages and that this is the seller's sole remedy, so the seller keeps the money instead of suing for the difference between the contract price and a later sale price. Massachusetts courts generally enforce these clauses. In Kelly v. Marx, 428 Mass. 877 (1999), the Supreme Judicial Court let sellers keep a 5% deposit even though they suffered no actual loss, holding that the test is whether the amount was a reasonable forecast of damages when the contract was signed. A deposit grossly out of proportion to any likely loss can still be challenged.

That's why "time is of the essence" language matters. When a contract includes it, deadlines are generally enforced as written, and a contingency not exercised in writing and on time generally stops protecting the buyer.

The inspection rules also changed. Under M.G.L. c.143 §101 and 760 CMR 74.00, for 1 to 4 unit homes, condos, and co-ops where the first Offer to Purchase or Purchase and Sale Agreement was signed after October 15, 2025, a seller and the seller's agent can't condition acceptance on the buyer waiving or limiting a home inspection, or accept an offer that requires such a waiver. More on that is in how to win a bidding war in Jamaica Plain without waiving your inspection and the guide to Massachusetts home inspection law for sellers. Buyers can still strengthen an offer in other ways, such as a larger deposit or a shorter financing or appraisal contingency. A buyer with fewer outs has less room to walk away clean, which generally strengthens the seller's position if the buyer tries to back out anyway.

Financing is its own category. If a buyer's mortgage falls through and the buyer properly exercises the financing contingency, the seller typically has to return the deposit even though the deal is dead. The causes are covered in the guide to buyer financing falling through. It's a frustrating outcome after weeks off the market, which is why financing strength matters as much as price when comparing offers.

What does this mean when selling in Jamaica Plain, Roslindale, or Dorchester?

It means the deposit and contingencies deserve as much attention as the price. Many homes in these neighborhoods sold above asking over the past year: 43% in Jamaica Plain, 51% in Roslindale, and 33% across Dorchester's four ZIP codes (MLS PIN via Repliers, September 2025 through August 2026). When a seller is choosing between offers, the temptation is to focus on price alone.

Deposit size and contingency structure deserve as much attention. A higher offer with a thin deposit and every contingency intact can carry more risk than a slightly lower offer from a buyer with a meaningful deposit, strong financing, and a shortened financing or appraisal contingency. The deposit is a signal of commitment and one of the clearest indicators of the seller's leverage if the deal goes sideways.

Juan Murray walks sellers through this evaluation before they accept an offer, not after. Knowing what protects a seller in the Purchase and Sale Agreement, beyond the headline price, helps avoid relisting a home that was already off the market for weeks.

How can sellers protect their earnest money position before accepting an offer?

Have an attorney review the deposit and contingency terms before you sign. A few things to confirm with an attorney before signing:

• Review the liquidated damages language directly. A bigger deposit doesn't help if the clause is vague about what happens when a buyer breaches.
• Make contingency deadlines specific dates. "Time is of the essence" language only works if the deadlines are clear.
• Ask who holds the deposit and on what terms. Whether it sits in the listing broker's escrow account or an attorney's, know the release terms if a dispute comes up.
• Weigh deposit size alongside price when comparing offers. The guide to choosing the best offer when selling in Boston covers the full picture.

None of this replaces a conversation with a real estate attorney, because the exact language in the Offer to Purchase and Purchase and Sale Agreement decides how a dispute plays out. Knowing what to ask for before signing is where an experienced local agent helps.

FAQ

How much earnest money is typical in a Massachusetts home sale?

Deposits usually come in two stages, a smaller one with the Offer to Purchase and a larger one with the Purchase and Sale Agreement. A Massachusetts real estate law firm describes a 5% total deposit as typical. It's a convention, not a legal requirement, so the amounts are negotiable.

Can a seller keep the earnest money if the buyer just changes their mind?

If the buyer walks away without a valid, properly exercised contingency, and the contract has a liquidated damages clause, the seller generally keeps the deposit. A buyer who correctly invokes a contingency within its deadline is generally entitled to a refund.

What is a liquidated damages clause in a Massachusetts P&S agreement?

It's contract language that sets the deposit as the seller's agreed remedy, commonly the sole remedy, if the buyer breaches without a valid excuse. Instead of suing for the full loss if the home later sells for less, the seller's recovery is generally limited to the deposit.

Does earnest money protect a seller if the buyer's financing falls through?

Not usually. If the buyer properly exercises the financing contingency, the deposit is typically returned even though the deal doesn't close. That's why a buyer's financing strength matters as much as the offer price.

Who holds the earnest money deposit in Massachusetts?

Usually the listing broker or an attorney. A broker must place it immediately in a bank escrow account, money the broker has no claim to, unless the parties agree otherwise in writing. Who holds it, and what happens if the parties disagree, should be spelled out in the Offer to Purchase and the Purchase and Sale Agreement.

The bottom line: whether a seller keeps earnest money in Massachusetts comes down to the contingencies and the contract language, so review both with an attorney before signing.

Sources

• 254 CMR 3.00(10), broker escrow accounts: https://www.law.cornell.edu/regulations/massachusetts/254-CMR-SS-3.00
• Vetstein Law Group, Massachusetts Real Estate Law Blog, liquidated damages and deposits: https://massrealestatelawblog.com/tag/massachusetts-liquidated-damages/
• NAR legal case summary, Kelly v. Marx: https://www.nar.realtor/legal-case-summaries/kelly-v-marx-home-sellers-may-keep-buyers-deposit-even-though-they-suffered-no-damage
• 760 CMR 74.03, inspection waiver limits: https://www.law.cornell.edu/regulations/massachusetts/760-CMR-74-03
• 760 CMR 74.04, exemptions and October 15, 2025 applicability: https://www.law.cornell.edu/regulations/massachusetts/760-CMR-74-04
• Joseph Singer, Harvard Law School, on REBA v. NREIS: https://faculty.law.harvard.edu/joseph-singer/2011/04/26/massachusetts-supreme-judicial-court-requires-lawyers-for-the-lender-to-be-present-and-active-at-real-estate-closings/
• MLS Property Information Network (MLS PIN) via Repliers, September 2025 through August 2026 (ZIPs 02130, 02131 and Dorchester 02121, 02122, 02124, 02125)

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About Juan Murray

Juan Murray is a Boston broker associate with more than 30 years of experience helping buyers, sellers, and investors across Greater Boston, personally leading every transaction from the first conversation through closing.

RE/MAX Real Estate Center · (978) 581-0801

Equal Housing Opportunity. Juan Murray is licensed as a Broker in Massachusetts, regulated by the Massachusetts Board of Registration of Real Estate Brokers and Salespersons. This article is general information only and does not constitute legal, tax, or financial advice. Confirm your specific costs and obligations with your closing agent, tax advisor, or lender.