What Does Under Contract Mean When Selling a Home?

When a home is listed as “under contract,” it signifies that a buyer and seller have formally agreed to a purchase, with both parties signing a legally binding contract. This status indicates the property is no longer actively on the market for new offers. However, the transaction is not yet complete, and home ownership has not officially transferred. This phase represents an interim period during which specific conditions must be met before the sale can finalize.

The Nature of an Under Contract Agreement

Entering an “under contract” status creates a mutual commitment between the buyer and seller, establishing the framework for the sale. The buyer typically provides an earnest money deposit, often ranging from 1% to 3% of the home’s purchase price, demonstrating their serious intent to proceed. This deposit is usually held in an escrow account, serving as a safeguard for the seller if the buyer defaults without a valid reason. For the seller, this commitment generally means taking the property off the open market.

The agreement includes various conditions known as contingencies, which are specific clauses that must be satisfied for the contract to remain valid. A financing contingency, for example, allows the buyer a period, typically 30 to 60 days, to secure the necessary mortgage loan approval. If the buyer is unable to obtain financing within this timeframe, they may terminate the contract without forfeiting their earnest money. This provision protects the buyer from being obligated to purchase a home they cannot afford due to loan denial.

Another common provision is the inspection contingency, which grants the buyer the right to have the property professionally inspected. This period, often 7 to 14 days, enables the buyer to uncover any potential issues or defects with the home’s structure or systems. Should significant problems be identified, the buyer can request repairs, negotiate a price reduction, or withdraw from the contract. This clause provides crucial protection by ensuring the buyer is fully aware of the property’s condition.

An appraisal contingency ensures that the property’s value, as determined by a professional appraiser, meets or exceeds the agreed-upon sales price. Lenders require appraisals to confirm the collateral’s value for the loan, and this contingency, typically lasting 10 to 14 days, protects the buyer from overpaying. If the appraisal comes in lower than the contract price, the buyer may renegotiate the price, pay the difference, or terminate the agreement. This safeguards the buyer’s financial investment and the lender’s risk.

A title contingency allows for a thorough examination of the property’s legal history to ensure clear ownership and identify any liens or encumbrances. A clear title is necessary for the property transfer, and this contingency protects the buyer from unforeseen legal claims against the home. In some cases, a home sale contingency may be included, which makes the purchase contingent upon the buyer successfully selling their current residence, typically within 30 to 90 days. These contingencies collectively define the conditions under which the sale will proceed, offering vital protections to both parties.

Navigating the Contingency Period

During the inspection contingency period, the buyer arranges for a qualified home inspector to examine the property. The inspector evaluates the home’s structural integrity, electrical systems, plumbing, HVAC, and other components, providing a detailed report of findings. Upon reviewing this report, the buyer may submit a request to the seller for repairs or a credit in lieu of repairs. Negotiations ensue, where the seller can agree to the requests, offer alternative solutions, or decline, potentially leading to contract termination.

Following the inspection, the appraisal process begins if the buyer is securing a mortgage. The buyer’s lender orders an independent appraisal to determine the property’s fair market value. A licensed appraiser visits the home, assesses its condition, and compares it to similar recently sold properties in the area. If the appraised value is less than the agreed-upon purchase price, the buyer and seller must decide how to proceed, which might involve the seller lowering the price, the buyer paying the difference, or a mutual agreement to cancel the sale.

Concurrently, the financing contingency involves the buyer completing their loan application and providing financial documentation to the lender. The lender’s underwriting department reviews the buyer’s creditworthiness, income, assets, and the property’s appraisal to issue a loan commitment. The buyer must promptly supply any additional information the lender requests, ensuring the loan approval process stays on schedule. Delays in providing documentation can extend this period or jeopardize the loan.

The title contingency involves a title company conducting a search of public records to verify the seller’s legal right to transfer ownership and identify any existing liens, easements, or other claims against the property. Any issues discovered, such as unpaid taxes or undisclosed heirs, must be resolved before closing. Securing title insurance protects the buyer and lender from future claims against the property’s title.

Resolution and Path to Closing

Once all contingencies outlined in the purchase agreement have been successfully met or formally waived, the transaction transitions into the final stages leading to closing. Both the buyer and seller work with their agents and legal representatives to prepare for the transfer of ownership.

The path to closing involves several key steps. These include the buyer conducting a final walk-through of the property to confirm its condition aligns with the contract and that any agreed-upon repairs have been completed. Funds are then transferred and disbursed. On closing day, all necessary legal documents are signed by the buyer and seller.

Conversely, a contract may terminate if one or more contingencies are not met and the parties cannot reach an alternative agreement. For instance, if the home inspection reveals significant defects and the seller refuses to negotiate repairs, the buyer may terminate under the inspection contingency. In such cases, the earnest money deposit is typically returned to the buyer.

If the contract terminates due to the buyer failing to meet a condition not protected by a contingency, or if they back out without a valid reason, the earnest money deposit may be forfeited to the seller. Once a contract is terminated, the property generally returns to an active listing status, allowing the seller to seek new offers.