House on a slopping hill

Backing Out Of Buying A House: A Complete Guide To If And When You Can Walk Away

Molly Grace7-Minute Read
March 29, 2021

As you go through the home buying process, things can change. Maybe you find out about issues with the home you’re buying, or a sudden change in finances means you can no longer obtain a mortgage.

When things come up, you might find yourself wondering, “Can I back out of buying a house?” While it’s highly unlikely that you’ll end up being literally forced to close on a house you no longer want to buy, there are certain financial – and, in rare cases, legal – consequences to backing out of a home purchase agreement after a certain point.

Let’s take a look at those consequences, when they might come into play and when you’re completely free to walk away from a home purchase.

Can I Back Out Of Buying A House? If So, When?

Yes, you can back out of buying a house, with an important caveat: depending on where you’re at in the process and what your contract says, you could end up losing money by doing so.

If you’re considering backing out of a home purchase, it’s important to consider the contingencies included in your offer, how much earnest money is at stake, and whether or not you’re under contract.

Understanding The Purchase Agreement

Your purchase agreement is the contract that outlines the terms and conditions of your home purchase. It is a legally binding agreement between the buyer and seller to proceed with the sale.

This contract is key to understanding whether or not you can walk away from the sale scot-free. Let’s go over a few different scenarios.

Before Your Offer Is Accepted

If you’ve got cold feet or just changed your mind, this is the best time to do it. If you submit an offer only to have a change of heart a few hours later, you can have your real estate reach out to withdraw your offer.

However, your time frame here will likely be limited. Once both the buyer and seller sign a purchase agreement, it becomes legally binding.

One of the main reasons buyers walk away at this part of the process is because the seller made a counteroffer that they chose not to accept or offer their own counter to. There’s no consequence to walking away from a counteroffer you aren’t interested in.

After The Purchase Agreement Is Signed

Once both the buyer and the seller have signed a purchase agreement, they’re both legally bound to complete the sale under the terms outlined in the agreement. This makes backing out of the purchase more complex.

Buyers will typically offer what’s known as an earnest money deposit. This deposit typically amounts to between 1% – 3% of the purchase price and is used to show the seller that the buyer is committed to completing the purchase.

When the sale is completed as planned, this money will be applied to the buyer’s down payment or closing costs.

When the buyer backs out of the sale for a reason not stipulated in the contract, however, the seller is typically entitled to keep this money. You may see this referred to as “liquidated damages” in your contract.

However, when most people make an offer on a home, they include contingencies that allow them to walk away under certain circumstances, even after they’ve signed the purchase agreement.

How To Get Out Of A Real Estate Contract

Your purchase agreement may include clauses that stipulate the conditions under which a buyer can legally terminate the contract. These are known as contingencies.

You’ll typically have a limited amount of time to act on these. Once the deadline for a contingency has passed, you’ll no longer be able to use it as a reason to back out of the purchase penalty-free.

Let’s get a more in-depth look at the most common home purchase contingencies.

The Disappointing Home Inspection

A home inspection contingency allows you to back out of a home sale based on the results of a professional home inspection.

This is considered to be a vital contingency, and it’s strongly recommended that home buyers include it in their contracts. Without it, you could end up being legally bound to buy a home with significant issues.

For example, say you’re in contract to buy a home and the inspector reports that the home has extensive plumbing issues and that the entire system will need to be replaced. If you have an inspection contingency, you can either renegotiate with the seller (to have them complete the repairs prior to closing, for example) or you can simply decide it’s not worth it and walk away, earnest deposit intact.

If you didn’t have this contingency in this situation, walking away would likely mean forfeiting your earnest money deposit.

The Low Appraisal

An appraisal contingency protects the buyer in the event that the appraisal comes in low. Without it, you could end up losing your earnest money if you walk away or having to make up the difference with your own funds.

If you’re using a mortgage to purchase a home, your lender will require an appraisal, which is used to determine a home’s fair market value. Lenders don’t want to lend more than what a home is worth, so if the appraisal comes in lower than the price you’ve already agreed to pay, you’re in a tough spot.

If you’re determined to make the sale happen, you can offer more of your own money to make up the difference. If you can’t afford to do this or just don’t think it’s worth it, you can walk away. If you have an appraisal contingency, you’ll be able to back out while keeping your earnest money.

The House That Won’t Sell

If you own your current home, chances are you’ll also be trying to sell your home while simultaneously going through the process of buying a new one. A home sale contingency ensures that you won’t have to buy a home if you aren’t able to sell your current one.

This contingency will give you a certain amount of time to complete the sale of your home. If you can’t find a buyer or the buyer you have backs out, you’ll be able to walk away from the purchase without penalty.

The Denied Loan

A financing contingency protects the buyer in the event that they aren’t able to secure financing to purchase the home. This contingency is vital if you plan on using a mortgage to purchase the home.

When you buy a home with a mortgage, you’ll typically first get preapproved to see how much money you’ll be able to borrow. Then, once you’re under contract and an appraisal has been completed, you’ll go through the full approval process.

If you have a sudden change in your financial situation or if your lender learns information that wasn’t part of your preapproval, it’s possible to be denied a mortgage even if you were initially preapproved for one. When this happens, a financing contingency allows the buyer to back out of the purchase while keeping their earnest money.

The Title Dispute

Title is a legal concept referring to property ownership. If you hold title on a home, you’re the legal owner of that property.

During the home buying process, title searches are typically completed on the home to ensure that there are no issues that could interfere with the new owner’s claim to the home. Common title issues include things like liens or unpaid property taxes.

If an issue is discovered during a title search, a title contingency allows the buyer to back out of the purchase.

When Backing Out Comes With A Cost

Outside of any contingencies or other stipulations in the contract, once both parties have signed the purchase agreement, they’re legally bound to proceed with the home sale.

For buyers, this means that you could lose your earnest money deposit if you walk away. On a $200,000 home, this could mean losing between $2,000 – $6,000.

FAQs

Can You Back Out Of Buying A House After Inspection?

If you have a home inspection contingency, you can back out based on the results of your home inspection – but only within the timeframe specified in your purchase agreement.

Can You Back Out Of Buying A House Before Closing?

In short: Yes, buyers can typically back out of buying a house before closing.

However, once both parties have signed the purchase agreement, backing out becomes more complex, particularly if your goal is to avoid losing your earnest money deposit. Look to your contract to understand the consequences of walking away.

Can A Seller Sue A Buyer For Backing Out?

Typically, buyers are less likely to be sued for a breach of contract than sellers who back out of a purchase agreement, but buyers should still tread carefully.

It’s possible for a seller to sue a buyer for backing out of a sale, but the instances of this actually happening are rare. Your purchase agreement may even state that the seller is limited to keeping the earnest money as damages if the buyer backs out, and that by signing they agree to not pursue other legal remedies.

Buyers may have more room to sue a seller who fails to complete a transaction. When a seller backs out of a purchase contract, not only will the buyer have their earnest money returned, but they may also be able to sue for damages or even sue for specific performance, where a court can order the seller to complete the sale.

While lawsuits are uncommon, if you’re thinking of backing out of a home purchase, it might be a good idea to consult with a real estate lawyer first.

The Bottom Line: Contingencies Are Your Best Bet

Sometimes, things don’t go according to plan.

This is why having the right contingencies included in your purchase agreement is so important. While it’s still possible to back out of a home sale without them, you risk losing your earnest money as well as potentially opening yourself up to legal issues. Contingencies protect you against some of the most common issues buyers run into during the home buying process.

Buying your first home? Check out some of our best first-time home buyer tips.

Apply For A Mortgage Online

Molly Grace

Molly Grace is a staff writer focusing on mortgages, personal finance and homeownership. She has a B.A. in journalism from Indiana University. You can follow her on Twitter @themollygrace.