If a buyer terminates a contract after their loan application is denied, what happens to the earnest money?

When a buyer terminates a contract due to a denied loan application, the handling of the earnest money is typically determined by the terms outlined in the purchase agreement and local real estate laws. If the contract does not contain a contingency clause that specifically allows for the return of the earnest money in the event of financing issues, the buyer may forfeit their earnest money. This means that if the buyer is unable to secure financing and simply decides to walk away from the contract, without a formal provision that protects them in this situation, the earnest money is at risk of being kept by the seller as compensation for taking the property off the market and for any associated costs.

In many real estate transactions, earnest money serves as a show of good faith to the seller, indicating that the buyer is serious about the purchase. Without specific protective clauses in place regarding financing, buyers can end up losing this deposit when a loan application is denied, making forfeiture of the earnest money the most accurate outcome in this scenario.