What Does It Mean to Back Out of a Home Purchase?
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Richard Haddad Managing EditorRichard Haddad is the managing editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.
Buying a house is a major milestone, but what happens when you have second thoughts, or you can’t fulfill the agreement you signed? Backing out of a home purchase isn’t a decision made lightly, yet it’s a scenario that buyers might face. But what’s the real meaning of backing out of a home purchase?
In this guide, we’ll explore what it means to withdraw from a house deal, the common reasons prompting this decision, and the timings involved. Additionally, we’ll discuss the safeguards buyers can put in place and provide practical tips to smoothly navigate this process.
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What does it mean to back out of a home purchase?
In the realm of real estate, “backing out” refers to the decision a buyer makes to withdraw from a home purchase after the offer has been accepted but before the sale is finalized.
This action is more formally known as rescinding or voiding a residential home purchase agreement. It’s a legal process where you, as the buyer, decide not to proceed with the purchase of the property. This decision can occur at various stages – after an offer is made but before it’s accepted, after signing a purchase agreement, or even days before the closing.
When you back out of a home purchase, it involves retracting your commitment to buy the property. It’s essential to understand that this decision can have legal, financial, and emotional implications, both for you and the seller. Depending on the terms of your purchase agreement and the timing of your decision, there may be penalties or loss of earnest money. However, in some cases, especially when proper contingencies are in place, backing out can be a seamless process with minimal consequences.
What are common reasons a buyer backs out?
As you navigate each stage of a home purchase, you might come upon unexpected turns. Here are some common reasons why you might decide to back out of a home purchase:
- Your loan financing fell through: It’s not uncommon for a mortgage loan to be initially approved but later denied due to changes in your financial situation or lending policies.
- You lost your job or income: A significant change in your employment status can impact your ability to secure financing, prompting a reassessment of your homebuying plans.
- You become ineligible for financing: Various factors, such as changes in your credit score or debt-to-income ratio, can suddenly make you ineligible for the mortgage you were relying on.
- The home appraisal came in too low: If the appraisal value is less than the agreed purchase price, it can create financing challenges, leading you to reconsider the purchase.
- A major issue was revealed in the home inspection: Discovering significant problems like structural damage or major system failures during inspection can be a deal-breaker.
- You are unable to sell your current home: If you’re relying on the sale of your current home to finance the new purchase, any delays or issues can cause you to back out.
- An issue was discovered in the title search: Unresolved liens or legal complications revealed in the title search can make the property less desirable or even unsaleable.
According to a HomeLight survey of more than 1,000 top real estate agents across the country, here are the top reasons buyers canceled a signed purchase agreement last year:
- Major issues were identified during the home inspection: 42%
- Buyers got cold feet due to high interest rates: 41%
- Home appraisal discrepancy: 8%
- Unable to secure their next residence in time: 5%
- Unresolved title, liens, or other issues: 4%
When can I back out of buying a house?
Deciding when to back out of buying a house is a matter of timing and circumstances. Generally, you can safely back out of a home purchase during these key stages:
- During the contingency period: Most home purchase agreements include contingencies for financing, inspection, appraisal, and title search. (More on these later.) If any issues arise during these contingency periods that can’t be resolved satisfactorily, you can usually back out without penalty.
- Before signing the purchase agreement: You have the flexibility to withdraw your offer at any point before the purchase agreement is signed. Until this legal document is executed, you’re not legally bound to the purchase.
- If there’s a breach of contract by the seller: If the seller fails to meet specific terms of the contract, such as not disclosing certain property defects or not adhering to agreed-upon timelines, you may have grounds to terminate the agreement.
- During the attorney review period: In some states, there is an attorney review period immediately after the contract is signed, during which either party can cancel the deal for virtually any reason. A 5-day review period is common.
As with any legally binding contract, it’s important for you to be aware of the specific terms and timelines of your purchase agreement. HomeLight recommends you consult with a real estate attorney if you’re considering backing out of a home purchase. They can provide guidance based on your unique situation and the laws in your area.
What happens when I back out of a home purchase?
Deciding to back out of a home purchase can have several outcomes, some more favorable than others. It’s important to understand the potential consequences of this decision:
- You could lose your earnest money deposit: If you back out of the deal without a valid contingency, the seller might be entitled to keep your earnest money deposit as compensation for the breach of contract.
- It could cost you time and effort: Searching for a home, making an offer, and going through the initial stages of buying can be time-consuming and emotionally draining. Backing out means you’ll have to start the process over again.
- Your mortgage preapproval could run out: Mortgage preapprovals have an expiration date. If you take too long to find another home, you may need to reapply, potentially facing different terms or rates.
- You could face legal action from the seller: Depending on the impact on the seller and the terms of your contract, backing out might lead to legal action from the seller seeking compensation for their losses.
- You could feel discouragement or relief: Emotionally, backing out can be a double-edged sword. While it can lead to feelings of discouragement or stress, it can also bring relief, especially if backing out is the best choice for your situation.
What contingencies protect a buyer when backing out?
When you’re considering backing out of a home purchase, certain contingencies in your contract can provide protection and legal grounds to do so without severe penalties. Here are some key contingencies that safeguard buyers:
- Financing contingency: Also known as a mortgage or loan contingency, this clause allows you to back out if you’re unable to secure a home loan. It’s a safeguard in case your loan approval falls through after signing the purchase agreement.
- Inspection contingency: This contingency lets you renegotiate or withdraw your offer based on the findings of a home inspection. It provides you with protection if major issues or repairs are discovered.
- Appraisal contingency: If the home appraises for less than the sale price, this contingency gives you the option to back out, as it can affect your loan-to-value ratio and mortgage approval.
- Title contingency: This protects you if there are issues with the property’s title, like unresolved liens or disputes over property boundaries.
- Home sale contingency: If you’re relying on the sale of your current home to finance the new purchase, this contingency allows you to back out if you can’t sell your existing home within a specified time frame.
- Insurance contingency: Sometimes, getting homeowner’s insurance at a reasonable rate might be difficult due to factors like location or property condition. This contingency allows you to back out if you can’t obtain suitable insurance.
It’s important to discuss contingency options with your real estate agent and ensure they’re included in your contract where applicable. An experienced agent will also know when the timing might be right to waive or remove a contingency from your purchase offer.
Can I make a non-contingent offer?
If you’re searching for a way to make a non-contingent offer or buy your next house before you sell your current home, contact us or ask your agent about HomeLight’s Buy Before You Sell program. This innovative program lets you unlock the equity in your current property to buy your next home, making your offer more attractive to sellers.
Here’s a short video illustrating how HomeLight Buy Before You Sell works:
When is it too late to back out of a home purchase?
Related to our list above about when you can back out of your home purchase, there are some points of no return — times when backing out becomes significantly more complicated or even impossible without substantial consequences. These include:
- After the contingency periods expire (you’ll likely forfeit your deposit)
- After signing the closing documents
- After you have taken possession of the home
You may also face financial penalties if you cancel the deal after your mortgage is finally approved and you’ve committed to the loan terms. Depending on your lender, withdrawing your purchase intent can lead to cancellation fees.
Tips to avoid trouble when backing out of a home purchase
Backing out of a home purchase can be a tricky and sometimes costly process. However, with the right strategies and knowledge, you can minimize risks and potential troubles. Here are some tips to help you navigate this situation more effectively:
- Understand your home purchase contract before signing: Ensure you’re fully aware of all terms and conditions. Knowing what you’re committing to can save you from future surprises.
- Ask your lender about an earnest money guarantee: Some lenders offer programs to protect your earnest money deposit, providing an extra layer of security.
- Monitor contract timelines and deadlines: Keeping a close eye on important dates helps you make informed decisions and take action within safe periods.
- Include contingencies in your offer: Contingencies provide legal grounds to back out of a purchase under specific circumstances without penalty.
- Be proactive — plan ahead: Anticipating potential issues and having a plan in place can make backing out smoother if the need arises.
- Have a financial safety net: Ensure you have enough funds to cover unexpected costs, like losing your earnest money deposit or other potential expenses.
- Communicate with the seller in writing: Consult with your agent about when and how you should communicate with the seller and their agent. Solutions often come from diplomacy and courtesy.
- Know the laws in your state: Real estate laws vary by state. Understanding these can help you better navigate the process and know your rights.
- Partner with a top real estate agent: A knowledgeable agent can guide you through the process, provide valuable advice, and advocate on your behalf.
HomeLight can connect you with a top agent in your selected buying location. Experienced agents know how to safely guide you through the entire buying and selling process. Partner with a professional to protect your earnest money and find the right home at the right price.
Header Image Source: (Brendan Stephens/ Unsplash)
