Can You Back Out of a House Offer and How?
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Summary:
You can back out of the deal for any reason if you’ve made an offer on a house and haven’t signed the home purchase agreement yet. That said, you can still back out of buying a house even if you have a signed contract, although you may face financial consequences such as losing your earnest money. You could also be faced with legal action, but that is much less likely.
If you think you’ve found your dream home (or at least a good starter house), it’s an exciting yet stressful time. There are many details to take care of and a lot can go wrong, which might cause you to wonder: Can you back out of a house offer if you need to?
The short answer is yes, but there’s a lot more to the explanation than that. Read on to learn about circumstances that might cause you to walk away from a house offer and how to protect yourself within the purchase contract.
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Can you back out of a house offer?
Even if you have an accepted offer, if you have yet to sign the purchase contract and change your mind about buying a house, you can ask your real estate agent to rescind your offer and face no repercussions.
It happens all the time — people lose their job, find a better house at the last minute, or just get cold feet or change their minds. As long as there is no signed contract, there is no legally binding reason you can’t back out of buying a house.
However, if you’ve already signed a real estate contract, it can be a little trickier to back out of the deal and you could lose your earnest money. That’s because a purchase agreement is a legally binding contract that is meant to protect both the buyer and the seller from either party violating the contract terms. In other words, you can’t typically just walk away from the deal without a very good reason.
“In today’s competitive housing market, it can be difficult for buyers to find the perfect home,” says Toni Gambill, a Real Estate Agent at LPT Realty in Sarasota, Florida. “However, sometimes things don’t go according to plan and buyers need to back out of a deal.”
It can be difficult for buyers to find the perfect home. However, sometimes things don't go according to plan and buyers need to back out of a deal. — Toni Gambill, a real estate agent at LPT RealtyClick to Tweet
How to back out of buying a house while under contract
As part of the home-buying process, the buyer and seller agree on a purchase price and then sign a home purchase agreement. This is a contract that stipulates the terms of the home sale which both parties have agreed to.
As part of the agreement, the buyer offers an earnest money deposit — typically anywhere from 1% to 3% of the accepted offer — which is considered a token of serious intent to buy. If you violate the terms of the contract, you may have to forfeit the earnest money. If all goes as planned, the earnest money deposit will be applied to the down payment or the closing costs.
But also included in the purchase contract are contingency clauses. Contingency clauses are conditions that must be met in order for the sale to go through. If the contingencies aren’t resolved, typically you’re free to walk away from the home purchase and keep your earnest money deposit.
“Buyers can typically back out without forfeiting the earnest money under specific contingencies outlined in the purchase agreement, such as financing, inspection, or appraisal issues,” explains Cam Dowski, real estate expert and founder of WeBuyHousesChicago. “It’s crucial for buyers to understand these contingencies and adhere to the agreed-upon timelines.”
IMPORTANT! Keep in mind that contingency periods vary, but they each have an expiration date. Depending on the contingency clause, you (or the seller) typically have anywhere from a week to thirty days to settle different contingencies.
Common contingencies included in purchase agreements
The following are brief explanations of some of the most common contingencies written into a home purchase contract.
Home appraisal contingency
Most lenders require an appraisal before you buy the house to assess the market value of the home. This is to protect the lender from issuing a mortgage for more than the house is worth. If you wind up with a low appraisal, the mortgage company might ask you to kick in a larger down payment to cover the difference. (Or they may deny your application altogether.)
Christa Kenin, an attorney and real estate expert with Douglas Elliman, explains why this sometimes happens.
“Bidding wars in a seller’s market can lead to inflated purchase prices. In this scenario, a home may appraise below the agreed-upon purchase price so a buyer may want to walk away from the deal. Also sometimes a bank will not offer the original mortgage amount if a home appraises under market value.”
If you can’t afford to pay any extra, you may have to back out of the contract and might not get your earnest money back. If you have a home appraisal contingency, you’re protected from that possibility, so you won’t end up losing money on the deal if you have to walk away.
Financing contingency
Before buying a house, you’ll go through a pre-approval process, whereby a mortgage company will determine the size of the home loan you’re pre-qualified for. However, this is not the final word on how much you can actually borrow. Once you’ve signed the purchase agreement and had a home appraisal, you’ll go through the final approval process.
A financing contingency is written into the purchase agreement in the event that your financial situation is such that you don’t make it through the final loan approval and fail to secure financing for the home purchase. If you don’t include a financing contingency and can’t obtain a mortgage loan, you could lose your earnest money.
In that scenario, a seller could very well choose to return your earnest money deposit — probably because you didn’t intentionally walk away from the deal — but they’re not legally bound to do so. Having the contingency written into the contract will ensure you don’t lose money if you have to back out.
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Home inspection contingency
Unlike the home appraisal, a home inspection isn’t required by lenders, but it’s highly recommended and should definitely be a contingency clause included in your contract. A home inspection is a must to make sure you’re not buying a house with major issues. But the home inspection contingency allows you to back out of buying the house without penalty if there’s an insurmountable problem.
“Often a potential buyer will either i) ask the seller to fix these issues before the sale or ii) ask the seller for ‘credits’ which means a price reduction from the originally agreed-to selling price,” Kenin explains. “Lots of deals fall apart at this point in the process. If a buyer wisely included inspection contingencies in the contract then the buyer may walk away from the contract and get their deposit back.”
Home sale contingency
If you already own a house when you’re ready to purchase a new one, you’ll likely have a home sale contingency clause. This means you aren’t obligated to buy the new house until your existing home sells.
If your home doesn’t sell within a certain period of time, or the sale falls through, you can be released from your contract and still keep the earnest money.
Title contingency
When you buy a house, your real estate attorney or a title company will do a title search to make sure the title (record of ownership) is free of any liens or encumbrances. The title contingency clause ensures that if any problems are uncovered during the title search, you can walk away from the deal and keep your earnest money.
Pro Tip
“To avoid complications, both parties should work with experienced real estate professionals who can guide them through the process and provide proper documentation,” says Dowski. “It’s also essential to maintain open communication to address any concerns or changes in circumstances promptly.”
FAQs
Is it okay to back out of a house offer?
At the very least, it’s inconvenient for the seller if the buyer backs out of the home purchase agreement. They’ve had to take their house off the market, stop considering other (potentially higher) offers, and go through a lot of time and effort to sell their home. So if a buyer decides to walk away, it could be a big problem for the seller.
On the other hand, if the home inspection reveals major issues, you can’t secure financing, the title search comes back with problems, or the appraisal comes back lower than the selling price, it’s okay to walk away from the home sale. If you’ve done your due diligence and held up your end of the bargain in regard to the contingency clauses, but it still doesn’t work out, you can back out of buying the house without guilt.
Can you be sued for backing out from a home purchase agreement?
If you fail to have the necessary contingency clauses in the contract, or a contingency expires without you taking action, and you back out of the deal, you’ll usually only forfeit the earnest money. But theoretically, the seller could take you to court and sue for breach of contract.
Typically this only happens if the seller believes you’ve caused them serious trouble without a good reason. For example, if the house was under contract for quite a while — meaning it’s been off the market and not considering other offers — and you back out of the deal, the seller may feel they have suffered monetary damages. (This is especially true if they can’t find another buyer.)
Having said that, sellers suing due to a failed home purchase aren’t common. If you adhere to the stipulations of the purchase agreement, follow through on your part of any contingency clauses, but still have to back out of the contract, you shouldn’t worry about being sued.
Can a seller accept an offer and then back out?
Similar to when a buyer puts an offer on a house, if there’s no contract in place yet, a seller can back out of the home sale. This might happen if the seller gets a better offer, for example.
But once the purchase contract has been signed, the seller is pretty much locked into the agreement unless the buyer fails to hold up their end of the contract. Or, if the seller backs out, they’ll usually have to return the earnest money deposit.
Key Takeaways
- A prospective buyer can back out of a home purchase offer without losing the earnest money if the house offer has been accepted but the contract hasn’t been signed.
- If the buyer signs the purchase agreement and then tries to back out, they may risk losing their earnest money deposit. However, if they include certain contingency clauses in the contract, the buyer may be able to regain their deposit.
- Common contingency clauses include a home inspection contingency, obtaining financing, or a low appraisal.
- If a seller backs out of a home purchase contract, they’ll typically have to return the earnest money unless the buyer fails to hold up their end of the agreement.
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