Life happens—even when you’re trying to buy a new home. The long lead-up time between making an offer on a home and closing on a home offers a lot of room for life to start happening, and for things to go wrong. Sometimes, it’s 100% necessary to back out of a home purchase.
Yet a real estate purchase is more than a purchase. It’s also a legal matter. If you aren’t careful, you could face significant financial consequences, as well as civil lawsuits, for backing out of your home purchase the wrong way. Understanding what you can and can’t do without issue can go a long way towards helping you protect yourself.
Here’s what you need to know.
Reasons Matter
For the most part, you should only back out of a home purchase if one of your contingencies gets triggered. A contingency is a clause that says you will purchase the house only if certain conditions are met.
If you back out of the home purchase for reasons covered by a contingency clause, you usually have nothing to worry about. Tell your real estate agent. Your real estate agent will draw up the paperwork and communicate the issue to the seller.
If you back out for any other reason, there could be repercussions.
See also: The Pros and Cons of Purchasing an Old House vs. a New House in Florida
Common Contingency Clauses
Certain contingencies are bog-standard and should be included in almost any purchase offer. These include:
- The home sale being contingent on your ability to secure mortgage funding.
- The home sale being contingent on the home appraisal coming back with an acceptable value.
- The home sale is contingent on an acceptable home inspection.
- The home sale is contingent on proof that a clear title exists.
If you are buying and selling at the same time, you can also make the purchase of the new home contingent upon the sale of the old one. This is risky, as it can weaken your offer, but may become necessary given your unique circumstances.
See also: What to Expect During the Home Inspection
The Impact of Contingency Deadlines
Technically, you can back out of a home sale right up until closing. In practice, most contingency clauses have expiration dates. You should make your decision and back out prior to those dates.
For example, you may have a contingency that gives you ten days to complete a home inspection, with the sale being contingent upon an acceptable home inspection. If you fail to complete the objection or trigger the contingency after eleven days, you could be out of luck.
Potential Consequences
Most sales contracts require you to put up 1% to 3% of the home sale purchase price in earnest money before the seller will take the home off the market.
If you back out of the deal for a reason that’s covered by the contract, then you usually get to keep your earnest money. If you back out for any other reason, the seller gets to keep that money. It’s their insurance for taking the house off the market in the first place.
For most buyers, losing the earnest money will be the end of it. In some cases, however, sellers can and do sue buyers. This happens if they can prove they took a significant financial hit by taking their home off the market.
Backing out of a home purchase could make future sellers and real estate agents less willing to work with you, as well.
Alternatives
You don’t always have to back out of the deal if there are issues with the purchase. For example, if the home inspection uncovers major issues, you can request that the seller address those issues before you buy. If the appraisal comes back too low, you can come back and request a price drop to something the mortgage company will actually agree to.
It’s usually a good idea to pursue alternatives in good faith before you back out of a deal, though this isn’t always the case. When in doubt, you should always ask your real estate agent how best to proceed.
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