Can You Back Out of Buying a House?

Financing Your First Home, Home Affordability, Mortgages

Whether it’s a bad first date, an awkward family dinner or a client meeting that goes on forever, life is full of situations that may require a smart exit strategy. The best exit strategies are as drama-free as possible and can reduce or virtually eliminate any hard feelings.

Home buying can be a lot like that, too. Maybe you thought you found the perfect home, but on second thought, you decide to back out after you’ve made your offer.

You can back out of buying a house. You’ll just need to keep your wits about you, plan ahead and be considerate of other people’s feelings. You can make a graceful exit and move on to the next, and hopefully right, home for you.

Is Buying This Home the Right Decision? Reason vs. Emotion

Making an offer on a home should never be done lightly. Making an offer and getting it accepted means that you are ready to begin the process of buying a home. It’s a process that has legal and financial consequences for both you and the seller.

In fact, to show the seller that you’re serious, most real estate transactions require that you put an earnest money deposit (or good faith deposit) into an escrow account. Because you could potentially lose the deposit under certain conditions, the money serves as an incentive to follow through on your offer.

Reason vs. Emotion

There are many reasons why someone might decide to back out of a home sale. Your financial situation may change, the opportunity to buy another home may appear or there may be issues with the home that weren’t apparent at first glance. 

And we know that buying a home is a big decision. It can feel overwhelming at times, and you’ll have your fair share of doubts during the process. While these feelings are totally natural – they shouldn’t determine whether you go through with buying a home.

That’s one of the reasons why it’s really important to have a real estate agent you trust. Your agent can help answer questions, ease any doubts and help you make the right decisions for you.

Due Diligence Fee

It is an additional, direct payment to the seller. It triggers a due diligence period when you can back out of the purchase and keep your earnest money.

Can You Back Out of Buying a House Before Closing? Yes, With Consequences

Yes, it is possible to back out of buying a house before closing. But it needs to be done strategically. Otherwise, you run the risk of losing your earnest money deposit and the money you paid for inspections and appraisals. 

Your first opportunity to back out will come during that narrow window between the time that your offer is accepted and the time that your real estate contract/purchase agreement is signed and you’ve made your earnest money deposit. 

Just know that if your real estate agent and the seller’s real estate agent work fast, they could hammer out an agreement pretty quickly, so your window to back out at this point is usually less than a day.

That’s why you have to include an exit strategy in your purchase agreement. 

How Can You Create an Exit Strategy? Plan Ahead

The best way to back out is to plan ahead. 

When your real estate agent drafts the purchase agreement, it should include several contingencies. Think of them as “escape routes” or legal ways to get out of a contract. 

Contingencies provide both the buyer and seller with windows of opportunities to back out of the deal. Each contingency includes:

  • Conditions that must be met
  • Contingency deadlines (during which conditions must be met)
  • Clarification about penalties if conditions aren’t met (such as losing earnest money) 

Here’s the thing about contingencies. They can only help you if they’re in the purchase agreement and the contingency language is as precise as possible. If a contingency isn’t in the agreement, or the terms aren’t clear, it can lead to trouble down the road.

Before you sign your purchase agreement, work with your real estate agent to make sure you understand everything and look for these common contingencies:

The financing contingency

As a buyer, you are expected to secure financing for the house within 30 – 60 days. That’s all the time you have to successfully obtain a mortgage loan from a lender. 

If you’ve already been preapproved for a mortgage, final mortgage approval shouldn’t take very long. This is one of the reasons why sellers prefer to work with buyers who are preapproved. It means their finances have already been verified by the lender, so there’s greater confidence that the buyer’s mortgage application will be approved. 

But, if something drastically changes during the application process – like losing your job or your financial situation changes – the application may be denied. And, in that case, you should be able to walk away from the deal.

The home inspection contingency

As a buyer, you have the right to request a home inspection. Usually, you’ll have 14 days to schedule an inspection and get a report. 

Hopefully, the report comes back with no major problems, and you can handle any minor issues by asking the seller to make repairs or by negotiating a lower purchase price, so you can make the repairs yourself.

But the inspection report may reveal significant issues, including:

  • Evidence of flooding in the basement
  • Mold in the walls
  • Problems with the foundation or structure
  • Potential leaks in the main water or sewer lines
  • Roof damage
  • Termite infestation

Issues like these could be signs of bigger problems and cost more to fix than you can afford. In that case, exercising the home inspection contingency will let you walk away.

The appraisal contingency

Your lender will want a home appraisal done before they can approve your mortgage. 

A home appraisal is performed by a licensed appraiser who examines the house and compares it to other homes in the area. After the appraisal, the appraiser will provide you and your lender with an estimated value of the home.

If the value of the home is significantly less than the sale price you agreed to, the lender may refuse to approve the mortgage. Usually, the buyer can use the appraised value to negotiate with the seller to bring the purchase price down.

If the seller refuses, the buyer can back out in good faith.

The home sale contingency

Not all contingencies are based solely on the home you’re trying to buy. If you need to sell your home to cover the cost of the new one, you’ll want to make sure you have a contingency in place for that as well.

That way, if your current home doesn’t sell, you can back out and hold on to your earnest money and your current home. Be aware that you may be asked to forgo this contingency in a competitive bidding situation.

The title search contingency

Your lender will perform a title search on the property during the mortgage application process. Think of this as a background check for the home. The title search makes sure that the seller is the home’s legal owner and can sell the home. The title search also determines if there are:

  • Liens on the home
  • Encroachment issues or property line disputes with neighbors
  • Other family members claiming ownership
  • Previous owner bankruptcies
  • Problems with forged documents or illegal deeds
  • Identity theft
  • Clerical errors in the public record

If the title search brings up one or more of these issues and they can’t be resolved, you can exercise your right to back out of the sale.

The force majeure contingency

Force majeure refers to events that affect the contract and are beyond human control, such as extreme weather, natural disasters and other uncontrollable circumstances that prevent any party in the home buying process from carrying out their contractual obligations. The interesting thing about force majeure is that it’s usually considered a reason to delay closing rather than cancel the contract.

For instance:

  • If a hurricane hits your area, it may be difficult to schedule inspections and appraisals or get a title search processed.
  • Your lender may need to delay approving your mortgage due to staffing issues or branch closures.
  • You may not be able to get a home insurance policy because your insurer has put a temporary hold on new policies.
  • You may not be able to access important documentation due to flooding or fire damage.
  • You may not be able to schedule a move-in due to street closures or evacuation orders.

In these situations, the force majeure contingency usually allows a reasonable time (up to 7 days) for things to sort themselves out. However, if the problems continue past 30 days, the buyer or seller may be able to back out and the buyer can get their money back.

The coronavirus contingency

Because there has been uncertainty about how much a pandemic counts as force majeure, a new contingency, the coronavirus contingency or coronavirus clause, has started to show up in new contracts.

This contingency provides leeway for both you and the seller if there are complications to the sale because of mandated restrictions, delays or other unanticipated events. It can also provide an escape clause for you or the seller if you lose your job or become ill during the pandemic.

What Is the Worst Case Scenario? The Angry Seller

If you need to back out of buying a house and the reason meets the terms of a contingency, you should be able to walk away with your earnest money safely in hand. 

No harm, no foul.

But there may be circumstances where you may need to back out of a sale but there are no contingencies that you can exercise.

In that case, you may have to walk away and wave goodbye to your earnest money deposit. But, depending on the situation, you might run the risk of being sued by the seller.

The seller may feel that they’re owed money for expenses (like releasing fees) since they took their house off the market for you. Maybe they kept their house off the market during a peak selling season. Maybe backing out has delayed their ability to sell their home and find a new one for themselves.

You may even face a lawsuit from the seller’s real estate agent if they feel they’re being cheated out of a big commission.

It’s important to note that lawsuits are the exception rather than the rule. But if you don’t want to spend time and money on legal fees, it’s best to make as clean and as gracious an exit as possible.

Backing Out With Style

Buying a home is a big, big decision. It’s not unusual to feel uncertain at any point in the home buying journey. This is when working with real estate professionals helps. Talk to your real estate agent before you make any decisions – big or small. It’s their job to protect your interests. And they can help you figure out if you’re making the right decisions for the right reasons.

If you do decide to back out of buying a home, take advantage of all your legal options. That’s why they’re there in the first place – to protect you. It also helps to treat the seller as you would want to be treated if it was your home on the market.

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