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

Going under contract for a house marks a significant step in the homebuying journey. It means a seller has accepted a buyer’s offer, and both parties have signed a legally binding agreement. While the property is typically removed from active marketing, the sale is not yet finalized. This phase is a period during which specific conditions must be met before ownership officially transfers. It represents a transitional stage where various financial and property-related checks occur before closing.

The Binding Agreement

The purchase and sale agreement, also known as a real estate contract, is the document that establishes a house as “under contract.” It outlines the terms and conditions agreed upon by the buyer and seller. It identifies the parties involved, describes the property, states the purchase price, and sets a proposed closing date.

The agreement includes an earnest money deposit. This deposit, held in escrow by a neutral third party, demonstrates the buyer’s serious intent. The amount can vary, often ranging from 1% to 5% of the purchase price, and is usually applied towards the buyer’s down payment or closing costs. It legally binds both parties to the contract, contingent on specific conditions.

Key Contingencies and Their Purpose

Real estate contracts commonly include contingencies, which are conditions that must be met for the sale to proceed. They protect the buyer, allowing withdrawal without penalty if conditions are not met. The timeframe for satisfying these contingencies is typically outlined in the contract, often ranging from several days to a few weeks.

A financing contingency makes the sale dependent on the buyer’s ability to secure a mortgage. If the buyer cannot obtain financing within the specified period, this contingency allows them to terminate the contract and reclaim their earnest money. The home inspection contingency grants the buyer the right to have the property inspected for defects. If significant issues are discovered, the buyer can negotiate repairs with the seller or, if an agreement cannot be reached, terminate the contract.

The appraisal contingency safeguards the buyer if the home’s appraised value is less than the purchase price. Lenders typically will not finance more than the appraised value, so this contingency allows the buyer to renegotiate the price, pay the difference in cash, or withdraw from the contract if the appraisal is too low. A home sale contingency may be included for buyers who need to sell their current home to finance the new purchase.

Due Diligence and Approvals

During the “under contract” phase, buyers engage in various due diligence activities to fulfill the contract’s contingencies. The home inspection process involves a professional inspector evaluating the property’s structural and mechanical systems. The inspector provides a detailed report outlining any issues, which can then lead to negotiations between the buyer and seller regarding necessary repairs or credits.

If the buyer obtains a mortgage, the lender initiates an appraisal. A licensed appraiser assesses the home’s market value to ensure it supports the loan amount, often by comparing it to similar recently sold properties. The appraisal report is reviewed by the lender’s underwriting department, impacting loan approval. Underwriting reviews the buyer’s financial information, including credit history, income, and assets, to assess their ability to repay the mortgage.

A title search, conducted by a title company or attorney, verifies legal ownership and identifies any claims, liens, or encumbrances. After a successful title search, title insurance is typically obtained, protecting the buyer and lender from financial losses due to unforeseen title defects.

Preparing for Closing

Once contingencies are satisfied and due diligence is complete, the process moves to preparing for closing. Buyers receive final loan approval, confirming financing is in place.

The Closing Disclosure, provided by the lender at least three business days before closing, details the final terms of the mortgage loan. This includes the interest rate, projected monthly payments, and a breakdown of all closing costs and fees. Buyers should review this document, comparing it to their initial loan estimate for accuracy.

Near the closing date, the buyer conducts a final walk-through. This confirms the property is in agreed-upon condition, negotiated repairs are complete, and no damage has occurred. Documents like the deed and promissory note are prepared for signing at closing, along with payment of closing costs (typically 2% to 5% of the purchase price).