As a prospective homebuyer, you may be thrilled to find a house you love, eagerly making an offer and providing an earnest money deposit to show your interest. This deposit goes into an escrow account and is credited toward your down payment when you close on the house.
But what if circ*mstances change before closing? Can a buyer cancel an offer to purchase? The short answer is yes. However, neither side can say, “I changed my mind,” without facing some consequences.
Reasons to Back Out of a Home Purchase
Walking away from a sale is more common in a buyer’s market than in a seller’s market. Many factors come into play that might make a buyer want to pull the plug. Some are directly related to the market, while others are most personal.
Contingencies
Nearly all real estate contracts allow buyers to walk away without financial penalties if certain conditions are not met within a specific deadline. Known as contingencies, these qualifiers say that the buyer will follow through with the purchase unless:
- The property fails to pass a home inspection. Problems on the inspection report could mean costly repairs are imminent. The buyer may back out to avoid these costs.
- A title search reveals defects. Outstanding liens, back taxes, or ownership disputes uncovered by a title search could turn off a potential buyer, and with good reason.
- Financing falls through. If the buyer can’t secure a loan, the seller can’t reasonably insist they follow through with the purchase.
- The property is appraised for an unacceptable value. A low appraisal could affect financing. Normally, both parties renegotiate the deal if the appraisal comes up short.
- The buyer is unable to sell their existing home. The buyer’s ability to pay may be contingent upon selling another property. This stipulation allows them to back out if their own home sale fails.
Cold Feet
The reality of taking on a mortgage, assuming maintenance responsibilities, and moving to a particular location may hit the buyer after they make an offer. They may suddenly decide they don’t want to be tied down. Ideally, getting cold feet happens early on when the buyer isn’t punished for walking away without good reason.
Financing Problems
Difficulty getting a loan can crop up after the contingency period has passed. After all, just because a lender pre-approves a buyer doesn’t mean they are committed to providing financing. Last-minute changes to the buyer’s income or debts could cause the lender to rescind their loan offer.
Something Better Comes Along
Some buyers continue watching the market, even after committing to buy a house. This may result in finding another home that fits their needs even better. There are bound to be financial consequences, but the buyer is allowed to cancel the home purchase in pursuit of their true dream home.
Changing Circ*mstances
An unexpected job transfer or pay cut, sudden divorce, severe illness, death in the family, or any other life-changing events may warrant doing an about-face right before closing.
Natural Disasters
It’s uncommon, but a tornado, hurricane, flood, earthquake, or another unforeseen event could damage the home for sale. Most buyers walk away in such circ*mstances, and rightly so.
What Happens If You Walk Away?
Sellers know that life happens—that’s what contingencies are for. But if a buyer backs out of a purchase agreement without good reason, their earnest money could be at risk. All deposits are negotiable, but the more money the buyer puts down, the more confident the seller is. Of course, a higher deposit also means more risk if the buyer has to back out.
Losing or Keeping Your Earnest Money
The buyer is entitled to get their earnest money back if they cancel the sale during the inspection or disclosure period, under a contingency, or with another valid reason in mind. This decision is often between the buyer and the seller, with an account administrator disbursing the earnest money to the appropriate party. Lawyers may also get involved in complex or commercial transactions.
If the buyer simply changes their mind, they will most likely lose their earnest money. The deposit usually goes to the seller as indicated in the contract terms.
Agreeing to Cancel the Contract
It’s generally best for both parties to come to a mutual agreement about canceling the contract if one of them must back out. For instance, if the buyer wants to withdraw, the seller may agree to return or split the earnest money. Most sellers don’t want to create hard feelings and would rather let a few thousand dollars of earnest money go than delay getting their property back on the market.
Demanding Specific Performance
Most often, buyers back out of home purchases, but sellers may also change their minds. When this happens, the buyer can file a lawsuit demanding “specific performance.” This forces the seller to proceed with the sale. Even then, buyers have a few days after closing to reverse the transaction, a period known as the “right of rescission.” If the buyer does this, they may forfeit their earnest money if the seller complies with all the other contract terms.
Apply for a Mortgage Today
It’s good to know you can always cancel a home purchase before closing. Still, waiting to sign the contract until you’re sure you want the home and can afford to buy it is a far better choice. Whether you’re preparing to make your first offer or recently canceled a home purchase, you’ll want to get pre-approved for a loan before taking the next step.
Financial Concepts Mortgage offers competitive rates on numerous types of home loans. As Oklahoma’s premier mortgage lender, we have more than 20 years of experience helping buyers finance their dream homes. We are proud to be a locally owned mortgage bank, not a mortgage broker, allowing us to provide in-house loan origination, processing, underwriting, and closing. Begin your application online or call us at (405) 722-5626 to speak with a knowledgeable loan officer today.
