What Does It Mean When a House Is Under Contract?
Decipher the 'under contract' status in real estate. Grasp this pivotal phase that bridges an accepted offer and a successful home closing.
When a home is listed for sale, “under contract” represents a significant milestone in the transaction process. This status indicates a buyer’s offer has been accepted by the seller, forming a legally binding agreement. While under contract, the sale is not yet finalized, as specific conditions must be met before ownership can officially transfer. This phase allows for due diligence and financial arrangements to be completed.
Understanding the Under Contract Status
Becoming “under contract” signifies that a formal purchase agreement has been executed by both the buyer and the seller. This agreement transforms the property’s listing status from “active” to either “pending” or “contingent,” indicating it is typically no longer actively marketed. Buyers provide an earnest money deposit, also known as a good faith deposit, typically 1% to 3% of the purchase price. This amount is usually held in an escrow account by a neutral third party, such as a title company or an attorney, until closing.
The earnest money serves as a financial commitment from the buyer, assuring the seller that they are serious about proceeding. While this agreement is legally binding, it is typically made subject to various conditions, known as contingencies, which must be satisfied before the sale can be completed. These contingencies protect the buyer, allowing them to withdraw from the contract without forfeiting their earnest money if certain agreed-upon conditions are not met.
Key Stages During Contract
During the “under contract” period, several key processes unfold. The home inspection is an initial step, where the buyer hires a qualified inspector to evaluate the property’s condition. The inspector then provides a detailed report outlining any identified defects or issues. Findings from this inspection can lead to further negotiations, such as requests for repairs, seller credits, or adjustments to the purchase price.
Another significant stage involves the appraisal, which is often required by lenders to ascertain the property’s fair market value. Should the appraisal value come in lower than the agreed-upon purchase price, it could impact the loan amount a buyer can secure, potentially necessitating a renegotiation of the sale price or an increase in the buyer’s down payment.
The financing contingency provides a defined period for the buyer to secure final loan approval from a mortgage lender. This contingency protects the buyer’s earnest money if they are unable to obtain the required financing. Concurrently, a title search and review are conducted to ensure the seller has clear ownership of the property and that there are no undisclosed liens, easements, or other encumbrances that could affect the buyer’s future ownership rights.
Contract Termination Scenarios
Various situations can lead to contract termination before the sale closes. A frequent reason stems from issues discovered during the home inspection. If significant problems are identified and the buyer and seller cannot reach an agreement on repairs or concessions, the buyer may exercise their inspection contingency to withdraw from the purchase. Similarly, if the property’s appraisal value is less than the agreed-upon purchase price, and the parties cannot resolve the resulting financial gap, the appraisal contingency may allow the buyer to terminate the contract.
Another common scenario involves the buyer’s financing. If the buyer is unable to secure the necessary mortgage approval within the timeframe specified by the financing contingency, they can typically terminate the contract without penalty. Issues with the property’s title, such as an unresolved lien or an ownership dispute that cannot be cleared, also provide grounds for contract termination, as a clear title is generally a prerequisite for a sale to proceed.
If a contract is terminated due to a contingency failure, the buyer’s earnest money deposit is returned, provided the termination adheres to the purchase agreement. However, if the buyer defaults on the contract without a valid contingency, or changes their mind outside of the agreed-upon contingency periods, they risk forfeiting the earnest money to the seller.