How To Get Out of a Real Estate Contract Before Closing

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Disclosure: This article is not a substitute for legal advice. Please consult with a licensed attorney.

You may have found a home you thought was perfect, made an offer, and signed a purchase agreement. But then, things changed. Maybe the home inspection revealed serious flaws, your mortgage wasn’t approved, or you simply changed your mind. Whatever the reasons for backing out may be, you want to cancel your real estate contract.

Can you get out of a real estate contract? The answer is yes — but it could cost you, if your situation isn’t covered by a contingency in the contract.

Here’s what you need to know about getting out of a contact on a house.

Backing Out With a Contingency

It’s common for purchase agreements to include contingencies that let the buyer cancel the deal without penalty. The following are some typical contingencies to consider including in your real estate contract before you sign:

  • Financing contingency. Even if your lender preapproved you for a mortgage, it’s possible that your loan application could be denied. This contingency allows you to terminate the contract without losing your deposit if you’re unable to secure financing.
  • Home inspection contingency. If the home inspection reveals major problems with the home, this contingency lets you either negotiate concessions with the seller or walk away. This contingency often requires you to act within a certain amount of time after the inspection.
  • Appraisal contingency. If the home is appraised for less than the sale price, your lender may be unwilling to approve a mortgage large enough for you to complete the sale. You’ll either have to pay the difference on your own, or ask the seller to reduce the sale price. If you can’t come to an agreement, this contingency also lets you walk away without penalty.
  • Home sale contingency. If you already own a home, you may need to sell it to come up with the funds to buy your new home. This contingency lets you cancel the contract if you’re unable to sell your current home.
  • Title contingency. If the title search reveals a dispute over the home’s ownership or a lien on the property, this contingency lets you walk away from the deal.

If you back out due to a contingency, remember that you usually have a deadline for doing so. If the deadline has passed, you may have to pay a penalty.

Backing Out Without a Contingency

Can a buyer cancel a real estate contract without a contingency? Yes, but it can be expensive to do so.

Once the purchase agreement is signed, it’s a binding real estate contract. That means if you back out for reasons not covered by an agreed-upon contingency, you’ll face a financial penalty, which typically means losing your earnest money deposit.

What happens to your earnest money?

The earnest money deposit is typically 1% to 3% of the home purchase price, and is paid to the seller when the purchase agreement is signed. If all goes well, that money is applied to your down payment at closing.

However, if the buyer withdraws from a real estate contract without a contingency, the seller typically keeps that deposit. For context, an earnest money deposit on a $300,000 house could be as much as $9,000.

Breaking the Contract

If you back out of a sale after you’ve signed the purchase agreement, be sure to consult with your real estate agent or Realtor on the best way to do so. That way, you’ll make sure you’re minimizing the damage.

Your real estate agent likely will submit a formal rescission notice to the listing agent, who will notify the seller. Waiting too long to act could mean you’ll end up paying more — even if you’re backing out under a contingency.

FAQ: How To Get Out of a House Sale Contract

Here are answers to some frequently asked questions about how to back out of a real estate contract before closing.

Is an offer on a house legally binding?

An offer is not legally binding. The seller may make a counteroffer that the buyer can either accept, decline, or counter again. Only when a purchase agreement is signed by both parties does it become a legally binding contract.

How long do you have to change your mind after signing a contract?

The buyer can technically back out any time before paying their closing costs and sealing the deal. However, if the buyer wants to withdraw without having to pay a penalty, it’s best to do so before signing the purchase agreement.

The only way to avoid paying a penalty for canceling the deal after you’ve signed the purchase agreement is if you are doing so under a contingency clause in your contract. Even then, you’ll have to act within a certain time frame to avoid losing your earnest money deposit.

Should I back out of buying a house?

Buying a house could be the biggest financial decision of your life. If you’re not feeling good about the purchase, it may be wise to cut your losses and get out of the deal. If you’re backing out under a contingency in your contract — such as a subpar appraisal — you can back out without paying a penalty.

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