The term “under contract” in real estate means that a buyer and seller have agreed to the sale of a home in writing. We’ll explore what happens when a house is under contract, as well as how you can back out once you’ve signed on the dotted line.
what does it mean to be ‘under contract’?
In real estate, a home is under contract when a buyer and seller have signed and dated a legal document to purchase a home. The written agreement provides details about both parties and the property being purchased, along with a breakdown of the price and costs involved in the transaction.
once everyone signs the contract, they are bound by law to follow the terms of that agreement. Sometimes the term “contingent” is used to refer to a house that is under contract. that simply means that there are certain conditions or “contingencies” that must be met for the sale to be completed.
Under contract versus pending sale: how they differ
When you’re looking for a home, you may see the words “contingent,” “under contract,” or “pending” on the real estate listing. As a buyer, there are some important differences between these terms that can guide your decision about whether to keep an eye on the home if the sale fails.
under contract/contingent. A home listing with any of these statuses means there is still a chance you could buy the home, as the current buyer and seller are still working out the terms of the contract. for example, if there is an inspection contingency, the buyer could back out if the home inspection reveals problems the seller is unwilling to fix. once the house is back on the market, you could go in and buy it.
pending. If a home sale is pending, the buyer has made or signed a no-contingency offer. While there is a chance the deal could fail due to a financial contingency if the buyer’s mortgage is denied, they will most likely have to continue their home search.
how contingencies affect a house that is under contract
A signed purchase contract contains legal language and deadlines that all parties should be aware of. Contingencies provide buyers and sellers with a way to back out of a contract: If either party cannot meet a condition stated in the contract, they have the right to negotiate the terms of the contract or cancel it. the most common contingencies involve inspections, home appraisals, and financing.
The home inspection contingency is probably one of the most important contingencies for homebuyers. For a period of time that typically ranges from three to 14 days, a buyer can hire inspectors to check all components of a home, from the roof to the foundation, to ensure they are working properly.
Some types of financing require specific inspections. for example, lenders require termite reports in parts of the country where wood-eating insects are common.
A home appraisal is generally required if the buyer applies for a mortgage to purchase a home. A licensed professional appraiser compares the home’s features to similar homes in nearby neighborhoods to determine if the home’s value supports the sale price. if it does, then the appraisal contingency is met.
If the appraised value is low, the buyer can pay the difference, ask the seller to lower the price, or cancel the contract.
mortgage financing contingencies
Unless you have the cash to buy a home, you’ll probably need a mortgage financing contingency when you make an offer to purchase. The contingency must provide details about the type of mortgage you are applying for, including the terms and time frame for providing proof that you have been approved for the loan.
contingency financing gives you a way out if your loan doesn’t go through without risking losing the earnest money you paid up front. while that’s a benefit to buyers, some sellers may prefer cash-only offers to reduce the chance of a buyer’s financing failing.
housing sale contingencies
Buyers who are juggling the sale of their current home while trying to purchase a new home can protect themselves with a home sale contingency. but while it’s a good strategy for buyers who need more time to sell their home, sellers can decline an offer that includes this contingency if they need a quick sale and don’t want to risk their current home not selling and are stuck remarketing your home.
can a buyer back out once it’s under contract?
yes, under certain circumstances. Home inspection, appraisal, financing and sale contingencies give buyers a legal way to cancel a contract without losing money up front or facing consequences. however, there are also some less common scenarios in which a purchase contract could be redeemed by a buyer.
buyer adds an attorney review clause. Local laws may allow a buyer to back out of a contract without penalty if they choose to cancel after review by a real estate attorney. the review period is typically three business days in this scenario.
Title is not transferable. If a title search uncovers issues that could affect your ownership of the home, such as unpaid contractor liens or property tax bills, the sale could be canceled if the seller cannot provide a clear title.
what happens if you breach a real estate contract?
If a buyer or seller decides to back out of a contract, either party could be sued if they failed to meet the terms of the contract by canceling it. A breach of contract lawsuit could result in costly legal battles that could result in:
- either the buyer or the seller paying money damages
- seller returns buyer’s security deposit
- the buyer and seller completing a court-ordered home sale