Can You Back Out of a Home Purchase Agreement?

If things go wrong and you need to back out of a home purchase, you may wonder if you can get out of the deal without penalty.  

You have house hunted so extensively that you believe you should have your own HGTV series. You find the home of your dreams, sign a purchase agreement, pay an earnest deposit, snag a great mortgage, and cannot believe your good fortune. And then, something goes wrong, and you wonder if you should pull out of the deal. 

Can you back out of a home purchase agreement? 

Yes, but the wording included in the purchase agreement makes all the difference. Purchase agreements usually include contingencies, which are situations in which you can back out of the contract without penalty.

If the reason you pull out of buying a house is listed as a contingency, and you make the decision within the contingency period, you can get out of the deal. If not, you may lose money and, in rare cases, face court action.

How long does the contingency period last?

Your purchase agreement should include a closing date as well as specific timings for each contingency. For example, you may have 14 days to have the home inspected, and 45 days to secure a loan commitment. Before you sign a contract, make sure it includes the common contingencies listed below and that you understand the time frame for each one.

What you could lose 

When you make an offer on a home, it will include earnest money, designed to show the seller that you are serious about the purchase. You may also hear it referred to as a "good faith deposit." There is no specific amount that you must put down, but earnest money is typically between 1% to 5% of the sales price. For example, if you make an offer of $300,000 on a property, the offer would include between $3,000 and $9,000 in earnest money. 

Remember that when you sign a purchase agreement, the seller will take the house off the market and potentially miss out on other offers. This money is designed to give them some protection -- they can keep the deposit if the reason you're pulling out is not included in the contract, or you're outside of the contingency period. 

In addition to earnest money, you will also lose anything you've already paid for services, such as a home inspection or title search.

Contingencies: Your best defense

To protect yourself as a home buyer, consider adding these contingencies to your purchase agreement. But bear in mind that if you demand too many contingencies, the seller may be less inclined to accept your offer.

Financing: If your mortgage application is denied, this gives you legal standing to back out of the purchase agreement without penalty. If you lose your job after making the offer and no longer qualify for a mortgage, you would not have to continue with the purchase. The caveat is that you must cancel the deal within the contingency period. 

Home inspection: If the inspection uncovers any problems, this contingency allows you to negotiate. You can request that seller makes repairs or reduces the sale price. If the issue is something you do not want to live with, you can also walk away completely. For example, if the home inspection indicates black mold, you may not wish to live in the home, even after the problem has been mitigated. 

Appraisal: Let's say the seller asks $300,000 for the property, and you make a full-price offer. If the home appraisal comes back at $280,000 and the seller refuses to budge on the price, you have grounds to back out. 

House sale: If you must sell your current home to purchase the new home, make sure it is listed as a contingency. That way, if your existing home does not sell, you can still get your earnest money back. 

Title: The mortgage company requires a title search (and you want a title search) to ensure there are no issues, such as an ownership dispute. If the title search turns up a problem, you could be off the hook. 

Note: Getting cold feet is never an acceptable reason to back out of a home purchase. In fact, you have no chance of getting your earnest money back if you simply decide not to proceed. Take your time to decide whether you are ready to buy a home before you make an offer, and don't let a fear of missing out or an overzealous real estate agent rush you into a decision.

Do your homework

No matter how hot the housing market is, do your homework. Drive by a home at different times of day to get a sense of how loud the neighborhood is. If there are certain breeds of dogs that concern you, check out your potential neighbor's pets. Ask your real estate agent for a copy of homeowners association (HOA) rules and decide whether you can live with them. In short, do everything you can to avoid home buyer's remorse.  

If you learn about something that makes you uncomfortable after the contingency period is up, it will be too late to get your money back. If you are concerned that standard contingency periods do not allow you enough time to investigate, ask your real estate agent to change the contingency periods before you extend an offer.  

There is no way to buy a property with 100% assurance that you will love it. The right contingencies, however, can protect you in case you need to get out of a deal.

Article courtesy of

See also:

What Not to Do as a Home Buyer

Why Would You Need a Home Warranty if You Have Homeowner's Insurance?

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