Under which circumstances may a seller keep the earnest money deposit of a defaulting buyer?

• A. If the seller suspects that the buyer never intended to execute the contract
• B. If the buyer defaults after signing the contract
• C. If the buyer fails to meet closing date due to financing delays
• D. If the seller agrees to retain the earnest money as damages

Answer: (A)

Earnest money shows the buyer’s serious intent to complete the deal and is held in escrow to be applied to the purchase price at closing. It can be kept as forfeited damages when the buyer breaches in a way that shows they never intended to perform, or when the contract specifically allows forfeiture. Among the given circumstances, the most fitting one is when the seller has a reason to believe the buyer never intended to execute the contract in the first place; that lack of bona fide intent means there wasn’t a true agreement to perform, so retaining the earnest money aligns with the notion of compensating the seller for the breach.

The other scenarios rely on contingencies or cure rights: a buyer default after signing isn’t automatically forfeiture unless the contract has no cure and no valid contingencies; financing delays are typically covered by a financing contingency, which can allow termination without forfeiture; and simply the seller agreeing to keep the money as damages depends on a contract provision or mutual agreement, not a stand-alone circumstance.