What Does Under Contract Mean When Buying a Home?

The home buying process involves numerous steps. One significant phase is when a property is “under contract.” This status indicates that a seller has accepted an offer on their home, but the transaction is not yet complete. It signifies a mutual agreement has been reached, moving the property closer to a final sale. This initial agreement sets the groundwork for subsequent actions and conditions that must be fulfilled before ownership can officially transfer.

Understanding the “Under Contract” Status

When a home is listed as “under contract,” it means a seller has formally accepted a buyer’s offer, and a legally binding agreement is in place. However, the sale is not final, as it remains contingent upon certain conditions being met. This status differs from “active,” where a property is available for offers, or “sold,” which signifies the completion of the transaction and transfer of ownership.

Another common status is “pending,” which typically means all contingencies have been satisfied, and the sale is moving towards closing. The “under contract” designation often implies that the property is off the market and will not accept other purchase offers, though some listings might be “active under contract,” meaning backup offers are still being considered. While “under contract” indicates significant progress, it also highlights that the agreement is provisional until all stipulated conditions are fulfilled.

Essential Contract Components

Transforming a verbal agreement into a legally binding “under contract” status involves several elements documented in a purchase agreement, also known as a sales contract. This formal document identifies all parties involved, including the buyer and seller, and provides a clear legal description of the property being sold. It explicitly states the agreed-upon purchase price and payment terms, which are fundamental to the transaction.

A significant component is the earnest money deposit, a sum paid by the buyer to demonstrate serious intent and commitment to the purchase. This deposit, typically ranging from 1% to 5% of the purchase price, is held in an escrow account by a neutral third party until closing. The purchase agreement also specifies the anticipated closing date, outlining when the official transfer of property ownership is expected to occur.

Common Contingencies

Contingencies are clauses within the purchase agreement that must be met or waived for the sale to proceed. They offer buyers an “out” to terminate the contract without penalty under specific circumstances.

Inspection Contingency

The inspection contingency allows the buyer 7 to 14 days to conduct a professional home inspection to identify any issues with the property. If major defects are found, the buyer can request repairs, negotiate a price reduction, or withdraw from the deal, often with their earnest money returned.

Appraisal Contingency

An appraisal contingency protects the buyer if the home’s appraised value is less than the agreed-upon purchase price. Lenders typically only finance up to the appraised value. This contingency allows the buyer to renegotiate the price, cover the difference out-of-pocket, or terminate the contract and retain their earnest money if the appraisal comes in low.

Financing or Loan Contingency

The financing or loan contingency provides a window for the buyer to secure the necessary mortgage financing. If the buyer cannot obtain loan approval within the specified period, they can typically withdraw from the contract without forfeiting their earnest money.

Sale of Current Home Contingency

A sale of current home contingency protects buyers who need to sell their existing property to finance the new purchase. This condition allows them to back out if their current home does not sell within a predetermined timeframe. These contingencies ensure buyers are not obligated to complete a purchase if certain conditions related to the property’s condition, value, or their financial capacity are not met.

The Path to Closing

Once a property is under contract, a series of procedural steps commence to move the transaction towards closing. This period spans 30 to 60 days for financed purchases, though cash sales can close much faster. The buyer submits the earnest money deposit and any due diligence fees to an escrow agent, ensuring funds are held securely.

Following the initial deposit, the home inspection is scheduled and completed within 7-14 days, allowing buyers to evaluate the property’s condition. Concurrently, the appraisal process is initiated by the lender to determine the home’s fair market value, protecting both the buyer and the lender from overpaying. Loan underwriting proceeds, where the buyer’s financial documents are reviewed to secure final mortgage approval.

A title search is conducted to ensure the seller has clear legal ownership and to identify any claims, liens, or encumbrances against the property. Title insurance is typically required to protect the buyer and lender against unforeseen title defects. As the closing date approaches, a final walkthrough is conducted to ensure the property is in the agreed-upon condition, and all agreed-upon repairs have been completed.

Finally, at closing, all necessary documents are signed, funds are transferred, and ownership officially passes to the buyer.

Navigating Under Contract Properties as an Outside Buyer

Even if a home is “under contract,” it may still be possible for an outside buyer to make an offer. This is often referred to as a “backup offer.” A seller might accept backup offers, particularly if the property is listed as “active under contract,” as a safeguard in case the primary contract encounters issues.

Approximately 7% of real estate contracts terminate, often due to issues with home inspections, financing, or appraisals, which could open the door for a backup offer. Making a backup offer positions a buyer as the next in line should the initial deal fall through. This can be advantageous, as it provides an opportunity to secure a desired property without having to compete in a new bidding war if the primary offer fails.

However, there is no guarantee the primary offer will fail, and a backup offer can lead to an extended waiting period and potential disappointment. Buyers should weigh the reduced control over the timeline against the chance to acquire the property if the initial transaction does not materialize.