What Does It Mean to Be Under Contract for a House?

When a house is described as “under contract,” it signifies a significant stage in the real estate process, moving beyond a simple offer to a legally binding agreement between a buyer and a seller. This phase is a crucial period for both parties, marking a commitment to proceed towards the final sale, provided agreed-upon terms are fulfilled.

Defining “Under Contract”

A property is considered “under contract” when a buyer and seller have signed a legally binding purchase agreement, also known as a sales contract. This agreement outlines the specific terms and conditions of the sale, but the transaction is not yet finalized. Its completion is dependent on various conditions, known as contingencies, being satisfied.

This status differs from a simple “offer,” a proposal not yet accepted by the seller. It also differs from “pending,” which indicates most, if not all, contingencies have been met, and the sale is very close to completion. The “under contract” phase acknowledges a mutual commitment, with protective clauses still in effect for both parties.

Core Elements of the Purchase Agreement

The purchase agreement is a comprehensive legal document that forms the foundation of the “under contract” status. It specifies the agreed-upon purchase price, the earnest money deposit, and the targeted closing date. The property’s legal description and the identification of all parties involved are also included.

A significant component of this agreement is the earnest money deposit, a payment made by the buyer to demonstrate serious intent to purchase the property. This deposit, ranging from 1% to 3% of the purchase price, is held in an escrow account and can be forfeited by the buyer if they default on the contract. The agreement also outlines various contingencies, which are conditions that must be met for the sale to proceed.

Common contingencies include financing, inspection, and appraisal clauses. A financing contingency allows the buyer to withdraw from the contract if they cannot secure a mortgage loan within a specified timeframe. An inspection contingency grants the buyer the right to have the property professionally inspected and to negotiate repairs or even terminate the agreement based on the findings. An appraisal contingency ensures the property’s value, as determined by an independent appraisal, meets or exceeds the purchase price, protecting the buyer and the lender.

Managing the Contingency Process

Once a home is under contract, the focus shifts to fulfilling the conditions outlined in the purchase agreement. This period involves a series of procedural actions by both the buyer and seller, often within strict deadlines. For example, the buyer arranges for a professional home inspection to assess the property’s condition. Any significant issues identified can lead to negotiations for repairs, credits, or a price adjustment.

Simultaneously, if the buyer is obtaining a mortgage, the lending process moves forward, which includes ordering an independent appraisal of the property. The appraisal ensures the home’s value supports the loan amount, protecting the lender’s investment. Buyers also submit extensive financial documentation to their lender for underwriting, which is the process of verifying financial stability and approving the loan.

Another common contingency relates to the sale of the buyer’s current home, allowing them to complete the purchase only after their existing property sells. Throughout this phase, both parties must adhere to the timelines specified in the contract for each contingency. If a contingency cannot be met, or if new terms cannot be agreed upon, the contract may be terminated, often without penalty to the buyer, allowing them to recover their earnest money deposit.

Preparing for Closing

After all contingencies have been met or waived, the transaction moves into its final stages, preparing for the official closing. The lender completes the final underwriting review, ensuring all financial conditions for the loan are satisfied. A title search is conducted to confirm clear ownership and identify any liens or encumbrances that need to be resolved before the transfer.

Buyers receive a Closing Disclosure (CD) at least three business days before the closing date, detailing all financial aspects of the transaction, including loan terms, closing costs, and credits. This document allows buyers to compare final costs with initial estimates and ask any questions. A final walkthrough of the property is conducted before closing to ensure the home is in the agreed-upon condition and that any negotiated repairs have been completed.

The closing appointment involves signing legal documents, including the promissory note, deed of trust, and transfer of title. Funds for the down payment and closing costs are transferred via cashier’s check or wire transfer, and the seller receives their proceeds. Once all documents are signed and funds exchanged, the keys are handed over, and ownership officially transfers to the buyer.