Can You Back Out of a Mortgage Before Closing?

Purchasing a home involves navigating various agreements and deadlines. While signing a purchase agreement signifies a serious commitment, buyers may withdraw before closing. This possibility is governed by the initial contract. Understanding these parameters provides clarity on when and how such a withdrawal might occur.

Understanding the Purchase Agreement

A real estate purchase agreement, also known as a sales contract, is a legally binding document between a buyer and a seller. It outlines the terms and conditions of a property sale, establishing rights and obligations for both parties. This agreement details the purchase price, property description, and timelines. It becomes binding once both parties sign, and any provisions for withdrawal are explicitly defined within it.

Common Contract Contingencies

Real estate contracts frequently include specific conditions, known as contingencies, that must be satisfied for the agreement to proceed to closing. These clauses offer buyers a pathway to withdraw from the contract without financial penalty if certain conditions are not met within a specified timeframe. Adhering to the deadlines stipulated for each contingency is important for preserving the buyer’s ability to terminate the contract.

Financing Contingency

A financing contingency makes the home purchase dependent on the buyer securing a mortgage loan. This clause protects the buyer, allowing them to terminate the contract and receive a refund of earnest money if they cannot obtain financing within a predefined period. It often specifies the mortgage type, loan amount, interest rate, and term.

Appraisal Contingency

An appraisal contingency protects if the home’s appraised value is less than the agreed-upon purchase price. If the appraisal is low, this clause allows the buyer to renegotiate the price, request the seller make up the difference, or withdraw from the contract and retain earnest money. Lenders require an appraisal to ensure sufficient collateral for the loan.

Inspection Contingency

An inspection contingency grants the buyer the right to have the home professionally inspected within a specified period, commonly 7 to 10 days after contract execution. If the inspection reveals significant issues, this clause allows the buyer to request repairs, negotiate a price reduction, or terminate the contract without penalty.

Title Contingency

A title contingency ensures the property’s title is clear of legal encumbrances, claims, or defects before the sale finalizes. A title search identifies issues like undisclosed liens, easements, or unresolved disputes. If title problems cannot be resolved to the buyer’s satisfaction, this contingency allows withdrawal from the transaction.

Sale of Prior Home Contingency

A sale of prior home contingency allows a buyer to terminate the purchase agreement if their current home does not sell by a specified date. This is common for buyers who need the proceeds from their existing home to finance the new purchase and wish to avoid carrying two mortgage payments simultaneously. If the buyer’s current home fails to sell within the agreed-upon timeframe, this contingency provides an option to back out of the new home purchase without penalty.

Withdrawing Without a Contingency

A buyer attempting to withdraw from a purchase agreement without a valid contingency, or after the contingency period has expired, typically faces financial consequences. The most common outcome is the forfeiture of the earnest money deposit. Earnest money, usually 1% to 5% of the sale price, is a good faith deposit made by the buyer to demonstrate serious intent to purchase. If the buyer breaches the contract without a contractual right, this money is generally retained by the seller as compensation for taking the property off the market.

While forfeiture of earnest money is the primary financial consequence, a seller might pursue other legal remedies in rare cases. These remedies could include seeking specific performance, a court order compelling the buyer to complete the purchase, or suing for damages. Damages could be calculated as the difference between the contracted price and the property’s market value at the time of the breach, plus any other losses incurred by the seller. However, for residential transactions, specific performance and additional damages are less common, with earnest money forfeiture typically serving as the agreed-upon liquidated damages.

Formalizing the Withdrawal

Once a decision to withdraw from a purchase agreement is made, formal procedural steps are necessary. The buyer must provide written notice to the seller or their real estate agent. This notice should state the intent to terminate the contract, referencing the specific clause or reason. Specific forms, such as a “Termination of Contract” form, may be required.

Adhering to contractual deadlines for notification and action is important, as missing them can impact the buyer’s rights, including earnest money recovery. Earnest money release usually involves mutual agreement between buyer and seller, especially if there is a dispute.