Is Earnest Money Refundable in California?

Earnest money is one of the most misunderstood parts of buying and selling a home in California. Buyers worry about losing it. Sellers assume they can keep it if a buyer walks away. The truth is somewhere in between, and it depends mostly on timing and what the contract says. This guide covers both sides.

New to earnest money? Start with our guide: What Is an Earnest Money Deposit?

The Short Answer

In California, earnest money is generally refundable while the buyer’s contingencies are still in place. Once the buyer removes their contingencies in writing, the deposit is at risk, and the seller may be able to keep some or all of it if the buyer backs out without a valid reason. But even then, the seller doesn’t automatically get the money, and California law limits how much they can keep.

For Buyers: When Is Your Deposit Protected?

While your contingencies are active. Contingencies are the conditions that let you cancel the purchase and get your deposit back. The most common are:

Inspection contingency: Lets you cancel based on the home’s condition. The standard California purchase agreement sets this at 17 days after acceptance by default.
Loan contingency: Protects you if your financing falls through. The standard agreement also sets this at 17 days by default.
Appraisal contingency: Protects you if the home appraises below the purchase price. This is also 17 days by default.

These time periods can be negotiated, so check the exact dates in your agreement.

If the seller doesn’t hold up their end. If the seller breaches the contract or fails to deliver required disclosures on time, you generally have grounds to cancel and recover your deposit.

For Buyers: When Is Your Deposit at Risk?

After you remove contingencies in writing. This is the key moment. Under the standard California contract, contingencies don’t disappear on their own when the deadline passes. You remove them by signing a written contingency removal. Once you do, you’ve given up your right to cancel for those reasons.

After that point, backing out because you changed your mind, found another home, or got cold feet can put your deposit at risk.

Before removing contingencies, make sure:

Your inspections are complete and you’re comfortable with the results
Your loan is truly approved, not just pre-approved
The appraisal is in, or you’re prepared to cover a gap
You’ve reviewed all disclosures and, for condos, the HOA documents

For Sellers: When Can You Keep the Deposit?

Sellers are often surprised to learn how many conditions apply. Generally, a seller in California may be able to keep the deposit when:

The buyer defaulted without a valid reason. That typically means the buyer backed out after removing contingencies, not while a contingency was still active.
Both parties initialed the liquidated damages clause. The standard purchase agreement includes a liquidated damages provision, and it only applies if both the buyer and seller initialed it.
The amount is within California’s limit. For a home with one to four units where the buyer intended to live, the amount a seller can keep as liquidated damages is generally capped at 3% of the purchase price. If the buyer deposited more than that, the excess generally goes back to the buyer.

If the liquidated damages clause wasn’t initialed, the seller isn’t limited to the deposit but would generally have to prove their actual damages, which usually means a longer and more expensive legal process.

Increased deposits. If the buyer increases their deposit later in the transaction, California law requires a new liquidated damages provision, separately initialed by both parties, for the increased amount to count as liquidated damages. Without it, the seller’s claim is generally limited to the original deposit. The total is still subject to the 3% cap. In practice, this is usually handled with a separate form when the increased deposit is made.

What If the Buyer Misses a Deadline?

A missed deadline doesn’t automatically let the seller cancel and keep the deposit. Under the standard California contract, the seller generally has to first give the buyer a written Notice to Buyer to Perform, which gives the buyer a short window to act. Only after that window passes can the seller cancel. Sellers who skip this step can end up in a dispute they would otherwise have won.

How the Deposit Actually Gets Released

Even when it’s clear who should get the deposit, the escrow company won’t release it on its own. Escrow generally needs signed release instructions from both the buyer and the seller. If one side refuses to sign, the money stays in escrow until the parties agree or the dispute is resolved. Learn more in our guide to how escrow works.

California law discourages refusing to sign in bad faith, and a party who does so can face penalties. The standard purchase agreement also requires the parties to try mediation before going to court or arbitration.

Tips for Buyers

Don’t remove contingencies until you’re truly ready to buy
Put every cancellation in writing, on the right form, before the deadline
Keep copies of inspection reports, loan communications, and all notices

Tips for Sellers

Make sure the liquidated damages clause is initialed by both sides at the start
Track the buyer’s contingency deadlines, and use a Notice to Buyer to Perform when needed
Don’t assume you’re entitled to the deposit just because the buyer walked away

Related reading: how contingencies protect your deposit and what happens during escrow.

The Bottom Line

Earnest money is protected while contingencies are active and at risk once they’re removed. For sellers, keeping a deposit requires the right contract terms, the right timing, and the right process, and it’s generally limited to 3% of the price for owner-occupied homes. Understanding these rules before you sign can save you from an expensive dispute.

Buying or selling a home in Los Angeles? I help clients understand their deadlines and protect their deposit, or their right to it, from offer through closing. Contact me to talk through your situation.

This article is for educational purposes only and is not legal advice. Please consult an experienced real estate attorney.