Can You Back Out of a Home Purchase Agreement?

At one time, you enjoyed house hunting. Now, you've toured so many homes that you are thoroughly over it. Still, you need a place to live so you make an offer on a home, and the offer is accepted. After a good night's sleep, you realize that you've made a mistake. The house isn't in the part of town you want to live in, the schools are so-so, and you want nothing more than to back out of the home purchase agreement. What now?

Can a buyer back out of a purchase agreement?

Yes -- but the wording of the purchase agreement makes a difference. Purchase agreements usually include contingencies or situations in which you can back out of the contract without penalty.

As long as you're pulling out of the purchase due to one of the contingencies listed in the purchase agreement, you're golden. If not, you may lose money. In rare cases, you may even face legal action.

How long does the contingency period last?

Your purchase agreement should include a closing date as well as specific timing for each contingency. For example, if one of your contingencies is a home inspection (and it should be), you may have 14 days. If another contingency involves your ability to secure a loan commitment, that may come with a 45-day window.

Before you sign a contract, make sure it includes the contingencies listed below and that you understand the time frame for each.

What you could lose

When you make an offer on a home, it includes earnest money designed to show the seller that you are serious about the purchase. Earnest money is sometimes called an "earnest deposit" or "good faith deposit." There is no set amount that must be put down as earnest money, but it typically runs between 1% and 5% of the sales price.

Earnest money

For example, if you make an offer of $400,000 on a property, the offer might include between $4,000 and $20,000 in earnest money. As long as you go through with the deal, the earnest money goes toward your total down payment. Let's say you're putting 20% down on the house and make an earnest deposit of 2%. That means you have 18% more to put down.

When you sign a purchase agreement, the seller takes the house off the market and potentially misses out on offers from other buyers. Earnest money gives sellers some protection. If you pull out of the deal for a reason not included in the contract or you're outside the contingency period, they can keep the earnest money.

Prepaid services

In addition to earnest money, you will also lose anything you've already paid for services, such as a home inspection or title search. The typical home inspection costs between $279 and $399, and a title search ranges from $75 to $200.

Contingencies: Your best defense

To protect yourself as a home buyer, you can add contingencies to your purchase agreement. It's a bit of a balancing act; if you demand too many contingencies, the seller may be less inclined to accept your offer, but you still need to protect yourself. Here's a look at the most common types of contingencies.

Financing

If your mortgage application gets denied, this contingency gives you legal standing to back out of the purchase agreement without penalty. For example, if you lose your job after making the offer and no longer qualify for a mortgage, you could walk away.

Home inspection

If the inspection uncovers any problems, this contingency allows you to renegotiate. You can request that the seller make repairs or reduce the sale price. If the issue is something you do not want to live with, you can also walk away completely. For example, if the home inspection indicates a leaky basement with black mold, you may not wish to live in the home, even if the problem is addressed.

Appraisal

Let's say the seller's asking price for the property is $400,000, and you make a full-price offer. If the home appraisal comes back at $375,000 and the seller refuses to budge on the price, you have grounds to back out.

House sale

If you must sell your current home to purchase the new home, make sure it is listed as a contingency. That way, if your home does not sell, you can still get your earnest money back.

Title

The mortgage lender requires a title search (and you do want a title search) to ensure there are no issues with the property, such as an ownership dispute. If the title search turns up a problem, you could be off the hook.

Do your homework

Let's say that after signing the purchase agreement, you suddenly dream of all the places you'd rather live. Within hours, you have serious regrets. Getting cold feet is never an acceptable reason for breaking a contract. If you decide you don't want to proceed, you must do so knowing you will lose your earnest money. You can avoid this problem by taking your time to decide whether you are ready to buy a home before you make an offer.

No matter how hot the housing market is, do your homework. Drive by a home at different times of day to get a sense of how loud the neighborhood is. If there are certain breeds of dogs that concern you, check out your potential neighbors' pets. Ask to see a copy of homeowners association (HOA) rules, and decide whether you can live with them. Make the trip from the house to your office during rush hour to learn how long the commute really is. In short, do everything you can to avoid home buyer's remorse.

If you learn something that makes you uncomfortable after the contingency period is up, it's too late to get your money back. If the length of the contingencies in your purchase offer concern you, ask your real estate agent to extend them before presenting the offer. In other words, if you worry that you won't have enough time to get everything done, ask your agent to make sure you have more time.

There is no way to buy a property with 100% assurance that you will love it. The right contingencies, however, can protect you in case you need to back out of a deal.

Still have questions?

Here are some other questions we've answered:

• Closing on a House: What to Expect
• Home Buyer Checklist: Everything to Do to Buy a Home
• How to Apply for a Mortgage