What to know about backing out of a home purchase contract
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If you’re a prospective homebuyer who is having second thoughts, you’re not alone.
About 15% of all home contracts fell through in June, marking the highest share of cancellations since March 2020 — the start of the pandemic — when it was 17.6%, according to real estate brokerage Redfin. A year ago, the share was 11.2%.
Yet before you join the ranks of buyers who walk away from a deal in progress, it’s important to consider if it will cost you to do so. Or, if you have yet to sign an initial contract but are nearing that point, it’s worth knowing whether you can cancel at some point in a way that wouldn’t result in forfeiting your deposit.
How much money is at stake with a broken contract
Typically, buyers provide what’s called an earnest money or “good faith” deposit when an offer is made on a home, although the specifics vary from state to state. The amount is usually 1% to 5% of the purchase price but can run as high as 10% depending on the local market.
The deposit is kept in an escrow account and goes toward your down payment or other closing costs when you finalize the purchase at settlement.
If the seller accepts your offer and you sign a purchase agreement — whether weeks or months before settlement — you can risk losing that deposit if you try to get out of the contract without meeting the terms.
How contingencies can help protect buyers
Given the financial risks of a broken contract, it makes sense to ensure the final purchase is contingent upon certain aspects of buying a house. Common contingencies relate to home inspection, appraisal and financing.
For example, if the inspection were to reveal problems with the house that are unacceptable to you, a home inspection contingency generally would mean you can walk away and get your deposit back. Or, if the appraisal were to fall short of the agreed-upon sale price or you cannot secure a mortgage at a rate or terms specified in the contract, you could back out without losing your money.
Be aware, though, that the process and conditions for being able to recoup your deposit differs from state to state, said Erin Sykes, chief economist for Nest Seekers International, a real estate brokerage.
Why buyers are backing out
Several trends may boost the share of canceled agreements.
“Buyers are putting contingencies back in [purchase agreements] … and not giving it all away to sellers like they did a month ago,” said Stephen Rinaldi, president and founder of Rinaldi Group, a mortgage broker.
As for why buyers are backing out, it may be due to home inspections that failed to pass muster with the buyer — or at least gave them an out.
“They may be pulling out because of inspection contingencies … they may think they can cancel the deal now and then get a better deal on this property or another in the coming months,” Sykes said.
“But we don’t know how much the market is going to change,” she said.
They may think they can cancel the deal now and then get a better deal on…
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