What does it mean when a house is under contract?

Making an offer that's accepted is just the middle of a real estate transaction, not the end.

When you buy a home, this period when you’re under contract allows you to clear any conditions you wrote into the offer, like if you said your bid was contingent on your ability to get financing.

The contract is a legally binding purchase agreement, but the seller is still allowed to show the home, and other potential buyers can prepare backup offers in case the deal falls through.

However, the seller can’t drop out of the contract simply if a better offer came along than yours.

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Can you back out of an accepted offer?

If you or the seller can’t meet the contract contingencies for the sale, it will be voided and you can back out. Once you sign the contract, you’ll be given a set period of time to clear these contingencies or cancel the transaction.

Common contingency issues would be: not being able to nail down financing; finding major defects in the home during the inspection; or finding out through the appraisal process that the home’s value doesn’t match the purchase price.

Home inspectors don’t usually look for lead-based paint, evidence of pests, or issues with the roof, sewers or private wells. You’ll need to hire specific inspectors for those issues if you have concerns.

And if your inspector finds evidence of dangerous problems like radon gas, mold or asbestos, additional inspections may be recommended. These can be costly issues to resolve, so it’s best to uncover them before the sale clears.

Closing on a sale also involves doing a title search. If there are any liens or bankruptcies against the property, it may not be possible to transfer the title. The search also will uncover any easements or covenants, conditions and restrictions, commonly known as CC&Rs.

If there are easements and CC&Rs that interfere with your plans for the property, those are grounds for you to back out of the contract. So if an easement interferes with where you’d install a pool or swing set, and the CC&Rs limit what you can do with your yard or how you can enjoy it, you can cancel the deal.

What if the contingencies aren’t met?

If there are significant issues that come up during the contingency process — like, say, there's water damage, or the roof needs replacing — you can go back to the seller to negotiate. You can ask if the seller will come down on the price or fix the issues before closing.

If the seller refuses, it’s within your rights to back out of the deal.

While you likely got preapproval for a loan before making an offer on the home, financing sometimes does fall through. Your financial contingency ensures you’re not on the hook for a loan you can’t afford if you can’t secure a lender.

These are all fairly standard contingencies that will lead a home sale to fall through.

But make sure you’re aware of the timeline for meeting each of your contingencies, because they can vary. You generally have 30 days to secure a loan, but only seven to 14 to have the home inspected.

Be sure to read the fine print to be certain you won’t miss your opportunity to back out gracefully.

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What if I don’t have a contingency?

When you made the offer on the home, you put down a security deposit, known as earnest money. Your earnest money shows the seller that you’re serious about buying the house.

Backing out of a sale while you’re under contract without a contingency puts you at risk of losing your earnest money.

And the seller could even take you to court to force you to close on the home, under what’s called "specific action." Winding up in court is less common, but it’s a serious risk.

When is it too late to back out of buying a house?

After you’ve signed the contract and once the contingency period has passed, it becomes much harder to back out of real estate contracts, especially if the reason is a sudden case of cold feet.

Some states may require you to go into mediation with the seller if you have a serious dispute, in the hopes of keeping the matter out of court.

But once you’ve arrived at this point as a buyer, you’ve made it clear that you’re serious about purchasing the home.

If you need to back out and have good reasons, you should put those in writing to explain things to the seller. Ask your real estate agent to help you with the messaging on your letter.

If you’re still at odds with the seller even after mediation, you may need to bring in a real estate attorney to help you go over your options.

Ultimately, you may lose the money you put up in earnest, especially if you don’t have a good reason for backing out. But if you can no longer afford the home or mortgage, it’s a small price to pay in the short run to avoid an even more expensive issue of foreclosure or bankruptcy down the road.

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About the Author

Sigrid Forberg

Sigrid Forberg

Reporter

Sigrid is a reporter with MoneyWise. Before joining the team, she worked for a B2B publication in the hardware and home improvement industry and ran an internal employee magazine for the federal government. As a graduate of the Carleton University Journalism program, she takes pride in telling informative, engaging and compelling stories.

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