QIn July, I signed a contract to sell my house. My real estate broker is holding the $25,000 earnest money deposit. The buyer had 20 days in which to get financing but apparently was unable to get a loan commitment. I was not advised of this until last week, which was well past the 20-day contingency. The contract requires that settlement take place next Friday. What should I do? Can I keep the deposit if settlement does not take place?

AFirst, carefully read the sales contract. You state that the buyer had 20 days in which to get financing, but what happens if no loan has been obtained within this time? Some sales contracts state that the buyer can terminate the contract and get the deposit back, if, within the contingency period spelled out in the contract, the buyer specifically advises the seller in writing that financing is not available.

If, however, the buyer does not so advise the seller within the contingency period, then the buyer loses this right and remains legally obligated to comply with the terms and conditions of the contract. Then, if the buyer does not go to closing, he would forfeit the deposit to the seller.

Other sales contracts take a different approach. For example, the Regional Sales Contract commonly used in the Washington area permits the contingency to continue beyond the stated period of time. However, the seller has the right to give the buyer written notice that the contract will become null and void within three days unless the buyer: delivers to the seller a lender's approval letter, or removes the financing contingency and provides the seller with evidence of sufficient funds available to complete settlement without obtaining financing.

If your contract permits you to void the contract and you do so, then your buyer is not in default and you may not be able to keep the earnest money deposit. It's as if there was no contract; you're free to put the house up for sale again.

How do you determine if your buyer is in default? Once again, you have to look to the sales contract. Most contracts define "default." For example, in the Regional Sales Contract, the buyer is in default if he fails to apply promptly for financing if the contract is contingent on obtaining a mortgage loan, or he does not comply with a potential lender's reasonable requirements, or he makes any "deliberate misrepresentations, material omissions or inaccuracies in financial information that result in the Purchaser's inability to secure the financing."

Assuming that you signed the standard form contract, and that your buyer complied with those requirements but has been unable to obtain a loan, you have two alternatives. First, you can declare the contract null and void, in which case you will have to authorize the escrow agent to release the earnest money deposit back to the buyer. Second, you can wait until Friday and show up at settlement ready, willing and prepared to convey title to the buyer. If the buyer does not show up -- or is unable to complete closing because he does not have enough money -- you can then declare him in default and attempt to get the earnest money from the escrow agent.

The earnest money deposit is held in escrow. What exactly does that mean? One dictionary defines escrow as "a deed, a bond, money, or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition."

The escrow agent, usually a real estate broker or the settlement lawyer, has a legal duty not to deliver the deposit to anyone except under the conditions spelled out in the sales contract.

Thus, even if you think your buyer is in default, the escrow agent should not release funds to you unless the buyer gives his consent. Most escrow agents have a form release, which is signed by buyer and seller (and any real estate agents involved), authorizing how the deposit is to be distributed.

For example, in your case, your buyer may deny being in default. You will either have to try to negotiate a settlement with him or file suit. The escrow agent will not release the funds unless there is a written release or a court order spelling out how and where the money should be disbursed.

If your house has increased in value, you would be well advised to terminate the contract, return the deposit to the buyer and try to sell to another person. However, if property values are slowing down, or you think it will be difficult to sell your house again, you will have to wait until the settlement date before your buyer can be considered in default.

There is a moral to this: Do not rely exclusively on form contracts. They are basic and in many cases must be tailored to meet the specific needs of the buyer and seller. In the future, I would add the following language as an addendum to the contract: "If the purchaser does not obtain a firm, binding loan commitment letter from a mortgage lender within [a set number of] days, and does not advise seller of this fact within said period of time, the financing contingency will be deemed to have been removed and the purchaser will be obligated to go to settlement in accordance with the terms and conditions of this contract." Such a clause can at least give the seller certainty that he will be able to keep the earnest money deposit if the buyer does not go to closing.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.