Here’s What Happens When You Pull Out of a Home Purchase Contract

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Backing out of an agreement to buy a home could cost you. Read on to find out why. 

There’s a reason sellers tend to prefer cash buyers over those who need to get a mortgage. When a seller has the cash on hand to buy a home, there’s less risk of the deal falling through. On the other hand, a mortgage lender could pull a loan if something doesn’t check out during the underwriting process, leaving the seller to start from scratch and find a new buyer.

Now, most home purchase contracts include a mortgage contingency clause that basically states that if you’re unable to put a loan in place, you have the right to walk away from the deal as a buyer. And there are other contingencies that tend to go in real estate contracts that might offer you similar protection. But if you pull out of a home purchase contract for a non-covered reason, you should expect to lose the deposit you put down when you made your offer.

When you have a change of heart

When you make an offer on a home and a seller accepts, it’s common to put down a deposit known as earnest money. That deposit is held in an escrow account and released once the sale of the home is complete. What that earnest money does is protect the seller in the event that you change your mind about buying the home.

If you get cold feet about purchasing a property, you’ll generally have to forgo your deposit if you opt to walk away. Similarly, if you find a better home and you choose to purchase that one instead, you’ll lose your deposit.

If that’s something you can afford to do, great. You can chalk it up to a learning experience. But many people can’t afford to part with that sort of money.

Rocket Mortgage says the typical earnest deposit is about 1% to 3% of a given home’s purchase price. So if you’re buying a $400,000 home, which is roughly in line with the median home sale price today, as per the National Association of Realtors, that means you’d be giving up $4,000 to $12,000 by changing your mind about a home. That’s a pretty big financial hit.

When you can walk away without penalty

There are certain clauses you’ll commonly find in a home purchase contract that will give you the right to walk away without forgoing your earnest money. It’s common for these contracts to have an appraisal contingency so that if the home you’re looking at doesn’t appraise for a high enough price to allow your mortgage to go through, you can bail.

Similarly, it’s common for real estate contracts to include a home inspection contingency. This gives you the right to walk away without financial penalty if an inspector uncovers major issues with the home you’re looking to buy and the seller isn’t able to address those issues prior to your closing.

But unless you’re backing out of a home purchase contract for a covered reason that’s written into that agreement, walking away will generally mean leaving your deposit behind. So think carefully before you decide to bail on a home purchase. And just as importantly, make absolutely certain you really want to buy a given home before putting down earnest money on it.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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