How To Get Out Of A Real Estate Contract
Your purchase agreement may include clauses, also known as contingencies, that stipulate the conditions under which a buyer can legally terminate the contract.
You typically have a limited amount of time to act on these contingencies. Once the deadline for a contingency has passed, you can’t use it as a reason to back out of a purchase penalty-free.
Let’s take a more in-depth look at standard home purchase contingencies.
Home Inspection Contingency
A home inspection contingency lets you back out of a home sale if the home fails a professional home inspection.
This contingency is vital. Home buyers are strongly encouraged to add it to their contracts. Without it, you may be legally obligated to buy a home with significant structural issues.
For example, let’s say you’re under contract to buy a home, and the inspector reports that the home has extensive plumbing issues and the entire system needs replacing. If you have an inspection contingency, you can either renegotiate with the seller and ask them to complete the repairs before closing or decide it’s not worth it and walk away with your earnest deposit.
If you didn’t have a home inspection contingency, walking away might mean forfeiting your earnest money deposit.
Appraisal Contingency
An appraisal contingency protects the buyer if an appraisal comes in low. Without it, you may lose your earnest money if you walk away or have to make up the difference between the appraised value and the purchase price in cash at closing.
If you’re using a mortgage to purchase a home, your lender will typically require an appraisal to determine a home’s fair market value. Lenders don’t want you to borrow more than a home is worth. You’ll be in a tough spot if the appraisal comes in lower than the home’s agreed purchase price.
If you’re determined to make the sale happen, you can offer more money to cover the difference. Or you can walk away if you can’t afford it or don’t think it’s worth it. With an appraisal contingency, you can back out of the deal and keep your earnest money.
Home Sale Contingency
If you own your current home, chances are that you’re trying to sell your home while trying to buy a new one. A home sale contingency ensures you won’t have to buy a new home unless you can sell your current one.
This contingency will give you a certain amount of time to complete the sale of your home. If you can’t find a buyer or your buyer backed out, you can walk away from the purchase without penalty.
Financing Contingency
A financing contingency protects the buyer if they can’t secure financing to purchase the home. This contingency is vital if you plan on financing your home purchase with a mortgage.
When you buy a home with a mortgage, you typically get preapproved first to see how much money you can borrow. You’ll go through the final approval process once you’re under contract and the appraisal is complete.
Even if you were initially preapproved, a lender may deny your mortgage application if there’s a sudden change in your financial situation or your lender learns information that wasn’t part of your preapproval. When this happens, a financing contingency allows the buyer to back out of the purchase and keep their earnest money.
Title Contingency
Title is a legal concept that refers to property ownership. If you hold title to a home, you’re the legal owner of the property.
Title searches are typically completed on the home during the home buying process to ensure there are no issues that may interfere with a new owner’s claim to the home. Common title issues include liens or unpaid property taxes.
If the title search uncovers an issue, a title contingency allows the buyer to back out of the purchase penalty-free.
