Buying a house is not something you should ever take lightly. And when you find the perfect home, you want to make sure it’s the one you’ll be living in for the long haul. But what happens when plans change, for whatever reason, and you can’t follow through with the purchase?
If you've agreed to buy a house and change your mind, you’re probably wondering if you can back out, and if there’s a time limit on your ability to get out of buying a home. The answer could depend on just how far into the home buying process you are before you want to reverse course.
Common Reasons for Backing Out
Can you back out of the deal after the final walkthrough of your would-be next home? The answer is yes. Buyers can back out of a sales contract, and sometimes, they do. According to the National Association of Realtors’ (NAR) Realtor Confidence Index for May 2018, surveyed realtors said an average of 5% of contracts were terminated before closing.
Usually, if a buyer lawfully backs out of a purchase agreement, it’s because something turned up during the home inspection. This is the most common reason for buyers to exit a real estate contract, and in most cases, there is a contingency allowing a buyer to exit if they aren’t satisfied with the inspection results.
Other common reasons for a buyer to walk from a purchase include being unable to secure financing, the results of a title survey, and an unexpected appraisal value. As long as these were clearly outlined in the contract, there should be no issues canceling the sale for any of these reasons.
How Much Time Do Buyers Have to Back Out?
When a sales contract is signed, most buyers put down a deposit which is also known as “earnest money.” This cash is typically between 1% and 10% of the total purchase price and is held in escrow until the closing. If a buyer pulls out of a sale, he or she may have to forfeit this deposit to the seller, but it depends on what contingencies are in the original contract.
If you applied for a personal loan to help finance your home, federal credit law gives you three days to reconsider a signed credit agreement and cancel the deal without penalty. The Truth In Lending Act protects your "right to rescind" or "right to cancel," until midnight of the third business day after the credit transaction.
Consequences of Backing Out
If the buyer cannot secure a mortgage or sell their previous homes within a set timeline, they have the option to back out of a home sale penalty-free, as long as the language is in the contract. If you want these contingencies, make sure you get them in writing.
Some situations, however, are not covered by contingencies, such as a buyer simply getting cold feet. If buyers change their mind about a particular house, or making the leap into homeownership, it will cost them. The seller will get to keep the deposit, and in rare cases, they could take it even further.
Buyers will be responsible for covering fees like home inspections and appraisals, even if the sale is canceled before closing. Beyond a lost deposit and fees, there aren’t many other lasting consequences for a buyer who backs out of a home sale under the terms of the contract, but there is always potential for legal action from the seller.
Remember that a contract is legally binding. This means that if you break your end of the deal, you could be taken to court and be required to compensate any damages caused by your actions. These consequences could mean refunding the earnest money, or even compensating the buyer for storage and living expenses brought on by them expecting to have a house to live in.
The best way to avoid having to figure out how to get out of a contract is to make the right choice from the beginning. That’s where real estate agents come in: they can help ensure that the buying and selling process go so smoothly that you won’t even have to consider backing out of the deal.
When navigating the home buying or selling process, a good real estate agent can save you from some major headaches down the line, and offer guidance and support during home inspections and in negotiations.