Deposit forfeiture clauses let builders keep your earnest money if you do not close — even if the home has serious defects. Here is how they work.
Key Takeaways
- Most new construction contracts allow the builder to keep your entire earnest money deposit if you fail to close, regardless of the reason.
- Deposit amounts vary widely by builder and market, ranging from $500 for entry-level homes to $25,000 or more for luxury builders like Toll Brothers.
- Construction defects discovered during inspection typically do not give you a contractual right to cancel and recover your deposit.
- Only a handful of states, including California and South Carolina, provide meaningful statutory or judicial limits on deposit forfeiture.
- Counter-language such as inspection contingencies, graduated forfeiture schedules, and liquidated damages caps can be proposed through your attorney before signing.
When you sign a purchase agreement for a new construction home, you will almost certainly be asked to put down a deposit. Builders call this earnest money. It signals your commitment to the transaction and gives the builder confidence to allocate materials, schedule labor, and begin (or continue) construction on your behalf. The amount varies. Some builders ask for one percent of the purchase price. Others ask for three to five percent. In many markets, particularly where builders offer lot premiums, design center upgrades, or option packages, the total deposit can climb higher once you factor in option money and upgrade deposits paid at various stages before closing.
On a $400,000 home, a deposit of three percent means $12,000 out of your pocket months before you receive the keys. On a $600,000 home with upgrades, total pre-closing deposits can exceed $25,000. These are not trivial sums. And the contract language governing what happens to that money if the deal falls apart is one of the most consequential provisions in any new construction purchase agreement.
How Forfeiture Clauses Work
Most new construction purchase agreements contain a deposit forfeiture clause. The mechanics are straightforward: if you, the buyer, fail to close on the home for any reason, the builder keeps your entire deposit. The contract will typically describe the retained deposit as "liquidated damages" — a legal term meaning pre-agreed compensation for a breach of contract. The builder does not have to prove actual financial harm. The builder does not have to show that your decision not to close cost them a specific dollar amount. The clause simply states that the deposit is the builder's to keep.
The language typically reads something like this: "In the event Buyer fails or refuses to complete the purchase, Seller shall retain all deposits paid by Buyer as liquidated damages, and this shall be Seller's sole and exclusive remedy." Variations exist. Some contracts state that the deposit is retained "as agreed-upon liquidated damages and not as a penalty." Others omit the penalty disclaimer entirely. But the operative effect is the same: you walk, you lose the money.
What makes this clause particularly consequential in new construction — as opposed to a standard resale transaction — is the timeline. A resale purchase typically involves a two-to-four week due diligence window during which you can back out and recover your deposit. A new construction purchase agreement often spans six to twelve months, during which the builder has broad latitude to change plans, substitute materials, extend deadlines, and modify the home without your consent. Your deposit is at risk the entire time.
The Trap: Defects Do Not Release You
Here is where deposit forfeiture clauses become genuinely dangerous. In many new construction contracts, the forfeiture applies regardless of the reason you did not close. The builder does not carve out exceptions for construction defects, code violations, or health hazards discovered during the final walkthrough or independent inspection.
The buyer is placed in an impossible position: close on a home with known defects, or forfeit thousands of dollars. Neither outcome protects the consumer.
Imagine hiring an independent inspector who discovers active mold in the attic, hairline cracks in the foundation, or improperly installed electrical wiring that violates local building codes. Under a standard resale contract with a properly drafted inspection contingency, you would have the right to request repairs, negotiate a credit, or terminate the agreement and receive your deposit back. Under many new construction forfeiture clauses, you have no such right. The contract may acknowledge your ability to conduct an inspection. But it does not condition your obligation to close on the results of that inspection. The inspection is informational. It does not give you an exit.
Some builders compound the problem by offering their own limited warranty as a substitute for pre-closing defect remediation. The logic, from the builder's perspective, is that any issues discovered before closing will be addressed under the builder's warranty after closing. But warranties are not guaranteed outcomes. They are promises governed by their own terms, limitations, and exclusions. And once you have closed, your leverage to compel repairs diminishes substantially. For a deeper look at how builder warranties interact with purchase agreements, see our new construction contract checklist.
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Real Cases: How This Plays Out
These clauses are not hypothetical risks. They produce real financial harm to real buyers, and the pattern repeats across the largest production builders in the country.
A Hunterbrook investigation documented the case of Nesa Gee, a disabled Air Force veteran in Alabama who contracted to purchase a Lennar home. After Gee's independent inspector identified defects in the property, Gee decided not to close. Lennar retained Gee's $7,500 deposit. A disabled veteran, having done exactly what consumer advocates recommend — hiring an independent inspector — lost thousands of dollars because the contract did not provide a meaningful exit when the inspection revealed problems.
The same investigation documented a D.R. Horton transaction in which a couple's inspector discovered mold in their nearly completed home. When the buyers attempted to cancel, D.R. Horton informed them they would forfeit $25,000 in deposits. The couple ultimately recovered their money, but only by agreeing to purchase a different D.R. Horton home. They were not given a clean exit. They were given a choice between losing $25,000 and remaining contractually bound to the same builder whose construction practices had produced a mold problem in the first place.
When the only path to recovering your deposit is buying another home from the same builder who built the defective one, the forfeiture clause is functioning as a retention tool, not a damages provision.
LGI Homes presents another variation of the problem. Better Business Bureau complaints from LGI buyers document a recurring pattern: sales representatives verbally assuring prospective buyers that their deposits are refundable, only for the company to refuse refunds when buyers attempt to cancel. The written contract language governs, and that language almost invariably favors the builder. Verbal assurances from salespeople carry no legal weight once you have signed a document stating otherwise.
These are not isolated incidents. They are the predictable consequences of contract structures that place all the financial risk of a failed transaction on the buyer while insulating the builder from accountability for the quality of their own work. Buyers considering any of the major production builders should review the specific contract language used by that builder before signing.
The Legal Landscape
The enforceability of deposit forfeiture clauses varies by state, and the law is more nuanced than most builders acknowledge. Nearly every state applies some version of the same fundamental test: liquidated damages must be a reasonable pre-estimate of the harm the non-breaching party would suffer, and they must not function as a penalty designed to coerce performance.
Courts typically evaluate two factors. First, were the anticipated damages from a breach difficult to estimate at the time the contract was formed? Second, is the amount retained a reasonable approximation of those anticipated damages? If the answer to either question is no, the clause may be unenforceable as a penalty. A builder who retains a $25,000 deposit on a home that is subsequently resold to another buyer at the same or higher price has a weak argument that the forfeited deposit represents actual damages. The builder suffered no loss. The deposit is pure profit.
California provides the most explicit consumer protection in this area. Under California Civil Code Section 1675, liquidated damages in a residential purchase agreement for owner-occupied property of up to four units are presumed unreasonable if they exceed three percent of the purchase price. The statute creates a rebuttable presumption: the builder can attempt to show that higher damages are reasonable, but the burden shifts to the builder to prove it. This is a meaningful protection that most states do not provide.
Other states address the issue through common law rather than statute. Texas courts have generally enforced liquidated damages provisions when the amount bears a reasonable relationship to actual or anticipated harm. Florida courts apply a similar reasonableness test. Georgia has held that liquidated damages clauses are enforceable if damages were difficult to calculate at the time of contracting and the amount is a reasonable estimate. But "reasonable" is a fact-specific inquiry, and challenging a forfeiture clause requires litigation — a process most individual homebuyers cannot afford.
This is the practical reality that makes forfeiture clauses so effective for builders regardless of their legal enforceability. Even when a buyer has a strong legal argument that the forfeiture is an unenforceable penalty, the cost of litigating that argument often exceeds the amount of the deposit. A buyer who lost $10,000 is unlikely to spend $15,000 in legal fees to recover it. Builders know this. The clause functions as a deterrent not because it is always legally sound, but because challenging it is economically irrational for most buyers.
How Much Earnest Money Do Builders Require?
The amount of earnest money a builder requires depends on several factors: the builder's corporate policy, the local market conditions, the price point of the home, and the stage of construction at the time of contract. There is no single industry standard. But general patterns have emerged across the largest production builders operating in the United States.
D.R. Horton, the largest homebuilder in the country by volume, typically requires earnest money deposits ranging from $1,000 to $10,000 depending on the market and the price of the home. In entry-level communities marketed under the Express Homes brand, deposits tend to fall at the lower end of that range. For move-up homes in higher-cost markets, deposits of $5,000 to $10,000 are common. D.R. Horton also collects additional option deposits when buyers select upgrades through the design center, which can increase total pre-closing deposits beyond the initial earnest money amount. Buyers should review the D.R. Horton purchase agreement carefully to understand how each deposit component is treated upon cancellation.
Lennar, the second-largest production builder, follows a similar structure. Lennar's earnest money requirements often fall in the range of one to three percent of the purchase price. On a $350,000 home, that translates to $3,500 to $10,500. In markets where Lennar offers its "Everything's Included" package — where upgrades are bundled into the base price rather than selected individually — the deposit structure may be simpler, but the total amount at risk can still be substantial. Lennar's contracts, like those of most production builders, treat the deposit as liquidated damages in the event of buyer default.
Toll Brothers occupies the luxury segment of the market and requires correspondingly larger deposits. Earnest money on a Toll Brothers home can range from $10,000 to $25,000 or more, depending on the community and price point. For custom-configured homes where the buyer selects significant structural options and premium finishes, total pre-closing deposits — including design studio selections — can exceed $50,000. Toll Brothers' contracts are typically longer and more detailed than those of entry-level builders, reflecting the higher dollar amounts and greater customization involved. The forfeiture provisions in these contracts place proportionally more money at risk.
PulteGroup and its subsidiary brands (including Del Webb and Centex) generally require deposits in the $2,000 to $10,000 range. The specific amount depends on the brand, the market, and whether the home is a quick move-in (already under construction or completed) or a to-be-built contract. Quick move-in homes sometimes require higher initial deposits because the builder has already invested in construction and wants stronger buyer commitment.
Entry-level and regional builders — including Dream Finders Homes, Smith Douglas Homes, and smaller local builders — often require lower deposits, typically in the $500 to $2,500 range. These smaller deposits reflect the lower price points and the competitive dynamics in entry-level markets where buyers have more options and less ability to commit large sums before closing.
Regardless of the builder or the amount, the critical question is not how much earnest money you put down but what happens to it if the transaction does not close. A $1,000 deposit under a strict forfeiture clause and a $25,000 deposit under the same clause differ in magnitude but not in mechanism. In both cases, the builder retains the money without having to demonstrate actual damages. Before signing, ask the builder's sales representative to identify every deposit you will be required to pay throughout the process — including earnest money, option deposits, design center deposits, and lot premiums — and confirm in writing how each is treated if you cancel.
State-by-State: Which States Limit Deposit Forfeiture
Not all states treat deposit forfeiture equally. Some have enacted statutes or developed case law that provides meaningful limits on a builder's ability to retain buyer deposits. Others leave the matter almost entirely to the contract, which means the builder's drafted language controls. Understanding where your state falls on this spectrum is essential before signing a new construction purchase agreement.
The following overview groups states by the general level of protection they provide to buyers. This is a simplification — individual cases turn on specific facts, and the law evolves — but it offers a useful framework for understanding the landscape. For a more detailed comparison of how different states handle new construction contracts, see our state-by-state guides.
It is important to note that even in states with "limited" protection, a buyer is not entirely without recourse. If a builder retains a $30,000 deposit and then resells the home at the same or higher price within weeks, a court may find that the forfeiture constitutes an unenforceable penalty because the builder suffered no actual damages. However, reaching that determination requires litigation, and the cost of litigation is itself a barrier for most buyers.
If you are purchasing a new construction home, one of the first questions to ask is whether your state imposes any statutory limits on deposit forfeiture. If it does not, the contract language is the only protection you have — which makes the contract review process even more critical. Use our cancellation FAQ for additional guidance on your rights by state.
What to Look for in Your Contract
Before signing a new construction purchase agreement, search the document for any clause addressing the disposition of your deposit upon termination. Common phrases to flag include:
- "deposit shall be retained as liquidated damages" — This is the core forfeiture mechanism. It means the builder keeps your money without having to prove actual loss.
- "buyer's sole remedy shall be return of deposit" — This limits what happens if the builder breaches. You get your deposit back, but you cannot sue for additional damages even if the builder's breach caused you significant financial harm, such as costs of temporary housing or lost rate locks.
- "not as a penalty" — This phrase is included specifically to preempt a legal challenge. Builders know that courts can strike down liquidated damages that function as penalties, so they include this language to argue the clause was mutually agreed upon.
- "time is of the essence" — This phrase, often buried in boilerplate, means that if you miss the closing date by even a single day, you are in breach. When combined with a forfeiture clause, it means the builder can keep your deposit because you closed one day late.
When reviewing a contract from any of the major production builders, pay particular attention to how the contract defines "default." Some builders define default broadly enough to include failure to secure financing by a specific date, failure to complete a walkthrough within the builder's designated window, or failure to select options or upgrades within an allotted time frame. Each of these triggers could result in deposit forfeiture under a broadly drafted clause. Our clause library provides detailed analysis of the specific language used by the largest builders.
Counter-Language to Propose
Builders will not always accept modifications to their standard contract. Production builders in particular rely on standardized agreements and resist individual negotiation. But asking costs nothing, and in slower markets, builders may be more willing to negotiate. Consider proposing the following modifications through your attorney:
Inspection contingency with a right to terminate. Request language that conditions your obligation to close on the results of an independent inspection. If the inspection reveals defects that the builder declines to repair before closing, you should have the right to terminate and receive a full refund of all deposits. Proposed language: "If Buyer's independent inspection identifies material defects and Seller does not cure such defects prior to closing, Buyer may terminate this Agreement and receive a full refund of all deposits paid."
Graduated forfeiture tied to construction stage. Rather than an all-or-nothing forfeiture, propose a schedule that ties the amount the builder retains to the stage of construction at the time of cancellation. If you cancel before the foundation is poured, the builder has incurred minimal costs and should retain minimal deposits. Proposed language: "In the event of Buyer's default prior to commencement of construction, Seller shall retain $[amount] as liquidated damages. After commencement and prior to completion of framing, Seller shall retain $[amount]."
Cap on liquidated damages. Even if the builder will not accept an inspection contingency, request a cap on the amount that can be retained as liquidated damages. California's three percent cap is a useful benchmark. Proposed language: "Notwithstanding any other provision herein, liquidated damages retained by Seller shall not exceed three percent (3%) of the purchase price."
Mutual remedy parity. If the builder insists on retaining your deposit as its sole remedy for your breach, insist that the return of your deposit is not your sole remedy for the builder's breach. The asymmetry in most standard contracts — where the builder keeps your money if you breach, but you only get your money back if the builder breaches — is one of the most consequential imbalances in new construction contracting. For a comprehensive overview of what to negotiate, review our new construction contract checklist.
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What to Do If You Need to Cancel and Save Your Deposit
If you have already signed a new construction purchase agreement and are considering cancellation, the steps you take in the days and weeks before formally notifying the builder can determine whether you recover your deposit or lose it. This is not a situation where acting on impulse serves you well. A methodical approach, ideally guided by a qualified real estate attorney, significantly improves your chances of a favorable outcome.
Step 1: Review the contract for cancellation provisions. Before you take any action, re-read your purchase agreement in its entirety. Look for any provision that allows termination without forfeiture. Some contracts include a rescission period — a short window (often three to seven days after signing) during which the buyer can cancel and receive a full refund. If you are still within that window, exercise your right immediately and in writing. Even contracts that do not offer a formal rescission period may contain conditions under which the builder must refund deposits, such as failure to deliver the home by a specified outside date.
Step 2: Check your contingencies. If you included a financing contingency in your contract, verify whether you can invoke it. A financing contingency typically allows you to cancel if you are unable to secure a mortgage commitment by a specified date. If your financial circumstances have changed — a job loss, a credit event, or an interest rate increase that pushes your debt-to-income ratio above lender thresholds — this contingency may provide a contractual basis for cancellation with deposit recovery. The key is that the contingency must be invoked in the manner and within the timeframe specified by the contract. Similarly, if your contract includes an appraisal contingency, and the home appraises below the purchase price, you may have grounds to cancel without forfeiture.
Step 3: Document any builder breaches. Builders draft contracts that impose extensive obligations on the buyer, but they also undertake certain obligations themselves — including implied obligations of good faith and fair dealing in most states. If the builder has materially deviated from the plans and specifications, substituted significantly different materials without your consent, or failed to meet contractual deadlines, these may constitute breaches that excuse your performance. Document every deviation in writing, with photographs, dated correspondence, and any communications from the builder's representatives. A record of builder non-compliance strengthens your position if you need to argue that the builder, not you, breached the agreement first.
Step 4: Consult an attorney before notifying the builder. This is not the time for a general Google search. Consult a real estate attorney licensed in your state who has experience with new construction disputes. The attorney can review your contract, assess the enforceability of the forfeiture clause under your state's law, and advise you on the strongest legal basis for seeking a refund. In some cases, the attorney may identify contract provisions that the builder itself has violated, giving you leverage you did not know you had. The cost of a one-hour attorney consultation — typically $200 to $500 — is trivial compared to the deposit amount at stake.
Step 5: Negotiate a release. Not every cancellation ends in forfeiture, even when the contract language appears absolute. Builders have business reasons to negotiate. A protracted dispute costs the builder legal fees and delays the resale of the home. In a strong market, the builder may be able to resell your home quickly, possibly at a higher price. In these circumstances, a builder may agree to return some or all of your deposit in exchange for a mutual release of all claims. Approach this negotiation through your attorney. A professionally drafted release request is more likely to produce a result than an emotional phone call to the sales office. If the builder refuses to negotiate, your attorney can assess whether litigation or a demand letter invoking state consumer protection statutes would be appropriate.
Step 6: Do not simply stop communicating. One of the worst things a buyer can do is go silent. Failing to respond to builder communications, missing scheduled walkthroughs, or refusing to cooperate with the closing process gives the builder additional grounds to declare you in default. If you are considering cancellation, continue to comply with your contractual obligations while your attorney works on the cancellation strategy. Compliance preserves your options; default narrows them.
For answers to the most common questions about cancelling a new construction contract, see our cancellation FAQ.
Deposit forfeiture clauses are not inherently unlawful. A builder who has invested time and resources into a transaction has a legitimate interest in protecting against a buyer who walks away capriciously. But the clauses as currently drafted by many of the largest production builders go well beyond that legitimate interest. They create an asymmetric risk structure in which the buyer bears all the downside of a failed transaction — including transactions that fail because of the builder's own construction defects — while the builder bears none. Understanding this dynamic before you sign is the first step toward protecting yourself. Upload your contract to our free contract scanner for a personalized analysis of your deposit forfeiture risk.
Frequently Asked Questions
Can a builder keep my earnest money?
In most cases, yes. The vast majority of new construction purchase agreements include a deposit forfeiture clause that designates your earnest money as "liquidated damages" if you fail to close. Under these clauses, the builder can retain your entire deposit without proving actual financial loss. However, enforceability depends on your state's laws regarding liquidated damages. In states like California, statutory caps limit the amount a builder can retain. In other states, courts may invalidate a forfeiture provision if the amount is found to be disproportionate to the builder's actual or anticipated damages. Consulting with a real estate attorney in your state is the most reliable way to assess whether a builder can keep your specific deposit under your specific contract.
Is my earnest money refundable on new construction?
Generally, earnest money on new construction is not refundable once the contract's rescission period (if any) has expired. Unlike resale transactions, which typically include an inspection contingency that allows the buyer to recover the deposit if serious defects are found, most new construction contracts do not condition the buyer's obligation to close on the results of an inspection. Some contracts include a financing contingency that may allow for deposit recovery if the buyer cannot obtain mortgage approval, but this varies by builder and market. The contract language is the controlling document. If the contract states that the deposit is "non-refundable" or will be "retained as liquidated damages," those terms will generally be enforced unless a court finds them to constitute an unenforceable penalty under applicable state law.
How much earnest money does D.R. Horton require?
D.R. Horton typically requires earnest money deposits ranging from $1,000 to $10,000, depending on the market, the community, and the price of the home. Entry-level homes marketed under the Express Homes brand tend to require lower deposits, while move-up and luxury-tier homes in higher-cost markets may require deposits at the upper end of that range. In addition to the initial earnest money, D.R. Horton may collect additional deposits for design center selections and upgrades, increasing the total amount at risk before closing. Specific deposit requirements can vary by region and are set by the local division. Ask the sales representative for a written breakdown of all required deposits before signing. For more detail on D.R. Horton's contract terms, see our D.R. Horton purchase agreement guide.
What happens to my deposit if I cancel a new construction contract?
If you cancel a new construction contract outside of any applicable rescission period or contingency, the builder will typically retain your entire deposit under the contract's forfeiture clause. The builder does not have to prove that your cancellation caused a specific dollar amount of financial harm. The deposit is characterized as "liquidated damages" — a pre-agreed amount that compensates the builder for the breach. In practice, however, outcomes vary. Some buyers successfully negotiate partial or full refunds, particularly in strong markets where the builder can quickly resell the home. Others recover deposits by demonstrating that the builder breached the contract first — for example, by failing to build the home in accordance with the agreed plans and specifications. If you are considering cancellation, consult a real estate attorney before notifying the builder, and review our guide on backing out of a new construction contract.
Can I get my deposit back if the builder doesn't finish on time?
It depends on the contract language. Most new construction purchase agreements include provisions that give the builder broad latitude to extend the closing date without penalty. These provisions often cite force majeure events — weather, supply chain disruptions, labor shortages, permitting delays — as acceptable reasons for delay. If the contract includes a specific outside completion date after which the buyer may terminate, and the builder fails to complete the home by that date, the buyer may have grounds to cancel and recover the deposit. However, many builder contracts do not include such a date, or they include open-ended extension clauses that effectively give the builder unlimited time to complete construction. If your builder is significantly behind schedule, review your contract for any "sunset" or "outside date" provision. If one exists, ensure you invoke it precisely as the contract requires. If one does not exist, consult an attorney about whether the delay constitutes a material breach under your state's common law. For a comparison of how major builders handle construction delays, see our builder comparison tool.
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