What Is Deposit Forfeiture?

Deposit forfeiture is a contract provision that allows the builder to keep your entire earnest money deposit if you fail to close on the home. It is one of the most common — and most costly — clauses in builder contracts.

The Short Answer

A deposit forfeiture clause states that if you default on the contract (fail to close for any reason not excused by a contingency), the builder may retain your full earnest money deposit as liquidated damages.

On a $400,000 home with a 5% deposit, that is $20,000 you could lose.

What Triggers Forfeiture

The most common trigger is the buyer's failure to close by the contract deadline. Other triggers may include failure to obtain financing (if there is no financing contingency), failure to make additional deposits on schedule, or any other breach of the purchase agreement.

The definition of "default" in your contract determines what triggers forfeiture. Read it carefully.

Is It Fair?

Builder contracts often include deposit forfeiture clauses with very broad triggers and no proportionality check. Whether the forfeiture amount is proportional to the builder's actual damages is a separate question.

In some states, a court may find a forfeiture clause unenforceable if the deposit amount is grossly disproportionate to the builder's actual loss from the cancelled sale.

However, in many states, courts will enforce the clause as long as the amount was a reasonable estimate of potential damages at the time the contract was signed.

How to Protect Yourself

Understand exactly what triggers deposit forfeiture before you sign.

Make sure your contract includes a financing contingency if your purchase depends on obtaining a mortgage.

Get pre-approved (not just pre-qualified) before signing.

Keep copies of all communications and meet all contract deadlines.

Ask whether any portion of the deposit is refundable under any circumstances.

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