Want to Back Out of a Home Purchase? Here's What You Need to Know
- You may decide to back out of a home purchase after agreeing to one.
- In some cases, you're within your rights to do so, but in others, you could end up forfeiting money.
- A common reason to back out is when a home inspector finds major issues with a house, or if a seller refuses to address those issues.
In some cases, you can walk away without penalty -- but not always.
At one point, the housing market was so hot and buyers were so desperate to purchase homes that they were willing to go to different extremes to get an offer accepted. Those included making offers without actually seeing homes in person and even waiving the right to home inspections.
These days, buyers are being less spontaneous and more cautious. The housing market has more inventory now, so they can afford to be more choosy. And with mortgage rates rising, buyers need to be careful about not taking on undue expenses in the course of purchasing a home.
In fact, buyers are increasingly backing out of home purchases for various reasons. In July, about 63,000 home purchases were called off, reports Redfin, representing a little more than 16% of homes that went under contract that month.
If you agreed to buy a home, you may be wondering if you're able to back out of the deal and what the consequences are. The answer? It depends on the reason as well as the contract you signed.
When you have an out
Most home purchase agreements come with a home inspection contingency. That allows you, as a buyer, to back out of a purchase if your inspection reveals extensive damage or issues, or if your seller refuses to address the issues your inspection uncovers.
Many buyers were willing to not have this clause added to their purchase contracts when the housing market was tighter. But if you have that clause and your home inspection unveils issues, you should have the right to back out without financial penalty.
You can't back out for any old reason
You may enter into an agreement to purchase a home, only to then get nervous about taking on such a high mortgage. Unfortunately, that's not a valid reason to cancel a purchase contract. That doesn't mean you can't cancel one, but if you do, you should be prepared to lose your earnest money.
Earnest money is a deposit you put down when you enter into a home purchase contract. Your seller has to return that money if you back out of your contract for a covered reason, like a problem uncovered during a home inspection. But if you back out due to getting cold feet, or due to finding a different home you'd rather purchase, your seller can keep your earnest money.
Now in some cases, giving up that deposit may be worth it. Say you agree to buy a home for $600,000 and then come across another one that better suits your needs for $550,000. If you put down a $6,000 earnest money deposit, giving it up may be worthwhile if it allows you to save $50,000 plus get a space that you prefer.
But in many cases, your earnest money is something you won't want to give up, so make sure your home purchase agreement contains the contingencies you need to protect yourself. There's no reason not to include a home inspection contingency so you have the option to back out if need be.
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