Your Deposit When the Deal Dies: Who Keeps the Five Per Cent

Most buyers understand the deposit as a formality — money moved early that will be credited at closing. It is better understood as the amount you are putting at risk to make your promise credible, because that is exactly what it is and exactly what happens to it if you do not perform.

The two payments, and why there are two

Massachusetts transactions typically run on two contracts rather than one, so the deposit arrives in two parts.

With the offer, a nominal amount — commonly $1,000. It makes the offer a real one.
At the purchase and sale agreement, the balance, bringing the total to a customary five per cent of the purchase price, though that figure is a convention rather than a rule and is negotiated on every deal. In a competitive round a larger deposit is one of the strongest signals a buyer can send, which is why it appears on the list of levers in arriving at your offer.

The gap between the two is the period in which the inspection happens, which is not a coincidence. The Massachusetts closing process sets out the sequence in full.

Where the money sits

In escrow — usually with the listing broker or with one of the attorneys — and the escrow agent is a stakeholder rather than an advocate. That distinction is the one people find hardest to accept when a deal goes wrong.

An escrow agent may release the deposit on joint written instruction from both parties, or on a court order. What they may not do is decide who is right. A buyer who believes they are plainly entitled to their money back, and a seller who believes equally plainly that they are not, produce a deposit that simply sits there — sometimes for a long time — until one of them signs a release or somebody goes to court.

Which means the practical answer to almost every deposit dispute is that it is settled by agreement, and the party with more patience and less need for the money has the better position. Worth knowing before you are in one.

What liquidated damages actually means

The standard form used across Greater Boston generally provides that if the buyer defaults, the seller may retain the deposit as liquidated damages — an agreed sum standing in for the loss, rather than a penalty, so the seller need not prove what the failed sale actually cost them.

The practical consequences run in both directions, and the second one surprises people:

For the buyer, it caps the exposure. Walk away without a protected reason and you lose the deposit — you are not generally pursued for the difference when the house later sells for less.
For the seller, it caps the recovery. A buyer whose default costs you a whole selling season may still only produce the deposit, which is one practical reason a larger deposit is worth more to a seller than the same money arriving later.

This clause is a term of a contract, not a statute, and it can be negotiated — which is a reason to have your own attorney read the agreement rather than assuming you know what is in it. Note also that a deposit is not automatically forfeited the moment a date is missed; what the contract says about notice, cure and time being of the essence is what governs.

The exits that protect the deposit

A contingency is the mechanism that gets the money back, and it only works if it is in the contract, still live, and exercised the way the contract requires. What each contingency protects covers them individually.

The inspection contingency, within its stated period and on its stated terms.
The mortgage contingency, where the buyer applied in good faith and was genuinely denied, by the stated date. This is the one most often lost on a technicality: the date passes without an extension being requested in writing, and the protection quietly evaporates while everyone is still cheerfully emailing about the closing.
The appraisal contingency, where one exists as a separate term.
A title defect the seller cannot cure, or the seller's own failure to perform.

And one that is no longer a variable at all. Since October 15, 2025, a seller or listing agent may not condition acceptance on a buyer waiving the home inspection, may not accept an offer requiring it, and may not impose terms that make inspecting meaningless — see the 2025 inspection law. Giving up that protection to win a house is not something you can be asked for.

Where deposits are actually lost

Rarely by dramatic default. Almost always by one of these:

A deadline missed while things seemed fine. The mortgage contingency date is the classic. Every extension goes in writing, signed, before the date — not after, and never on the strength of a phone call.
Cold feet with no contingency left. The clearest case for forfeiture there is.
A buyer who damages their own financing between approval and closing. Financing a car, opening a card, changing jobs, or moving money around in ways nobody can source. Underwriting is re-pulled near closing, and a denial you caused is not usually a good-faith denial. The pre-approval checklist covers what not to touch.
Waiving a contingency in writing in a competitive round and then wanting it back.

If the seller is the one who walks

The deposit comes back, and that is frequently not the buyer's only remedy. Because real property is treated as unique, specific performance — a court ordering the sale to proceed — is a real possibility in Massachusetts, and a buyer who has spent money on an inspection, an appraisal and a rate lock has costs beyond the deposit. What the contract says about the seller's default is as worth reading as what it says about yours.

Practical rules

1.Decide the deposit deliberately. It is a negotiating instrument, not a formality, and a bigger one buys real goodwill — but only commit money you can genuinely put at risk.
2.Know who holds it and on what terms, in writing, before you send it. And verify the wiring instructions by telephone using a number you already had — wire fraud at closing is how deposits are most spectacularly lost.
3.Diary every contingency date the day the contract is signed, and treat each one as final.
4.Get every extension in writing before the deadline, without exception.
5.Change nothing about your finances between application and closing.
6.If a deal is failing, talk early. A negotiated split agreed in a week is almost always better than the same argument conducted through lawyers over three months, because neither of you gets the money until one of you signs.