What Does Being ‘Under Contract’ Mean?
What does it mean when a house is under contract? Generally speaking, once you make an offer on a home you want to buy, there may be negotiations between you and the home seller. Eventually, if you both come to an agreement, you’ll sign a home purchase contract and work toward closing the transaction.
Let’s explore what happens when a home is under contract and the implications of backing out once you’ve signed on the dotted line.
- What does ‘under contract’ mean?
- Pending sale vs. under contract
- What are contingencies and how do they affect a house under contract?
- Can a homebuyer back out of a house contract?
What does ‘under contract’ mean?
As a homebuyer, you’re under contract on a home when you and the seller have signed a legally binding purchase agreement confirming that you’ll buy the home at a specific price if the conditions outlined in the contract are met.
“With certain caveats and carve-outs it basically says, ‘This buyer intends to purchase this home for a certain price within a certain amount of time,’” said Sarah Bolling Mancini, an attorney who works with the National Consumer Law Center.
You’ll also pay an earnest money deposit when you sign a home purchase agreement. Earnest money signals to the seller your willingness to buy the home and is credited toward the purchase price when it’s time to close.
And though you’re obligated to the purchase when a house is under contract, it doesn’t mean you can’t later cancel that agreement, said Mark Hakim, an attorney who works with Schwartz Sladkus Reich Greenberg Atlas in New York.
“Many contracts contain certain — what we like to call — ‘outs,’ or contingencies, which permit a buyer to cancel under certain circumstances and a seller to cancel under certain circumstances,” he noted.
How long a house can be under contract varies by state, but may range from 30 to 45 days.
Pending sale vs. under contract
A home that is pending sale versus under contract might appear to have separate meanings, but the phrases are used to identify the same step in the homebuying process. A home isn’t sold until the closing is complete.
“Here in New York, it’s semantics,” Hakim said. “So when [a house] is under contract or sale pending, it’s supposed to mean the same thing.”
What are contingencies and how do they affect a house under contract?
Contingencies are clauses in a home purchase contract that outline the specific conditions that must be met to complete a home sale. If those conditions aren’t met, the homebuyer may walk away from the deal without penalty and keep their earnest money.
Common contingencies include:
- A home appraisal close to the purchase price.
- A home inspection that’s free of major issues.
- A mortgage approval that meets the buyer’s needs in terms of loan amount, interest rate and closing costs.
- A home-sale condition that the buyer sells their current home before closing on a new one.
More than two-thirds (72%) of the home purchase contracts settled in December 2019 included contingencies, according to the latest Realtors Confidence Index survey from the National Association of Realtors.
Buyers should work with a real estate agent they trust and include the contingencies that make sense for their situation, Mancini said.
“It’s important to make sure that you get what you want in the contract to be sufficiently protected,” she said.
Can a homebuyer back out of a purchase agreement?
The short answer is yes. In most cases, a buyer under contract can back out if one of their contingencies isn’t met — for example, if they have an appraisal contingency and the appraisal comes in too low to justify the home price.
In the above scenario, the buyer’s earnest money would typically be returned to them and they’d move on to find another home.
Other situations where a buyer might be able to walk away and keep their earnest money are during the initial “due diligence” period, when the buyer can back out for any reason, or if the title search reveals issues that could derail the sale, according to Mancini.
If a buyer walks away from a home purchase agreement for a reason that isn’t covered by a contingency or the due diligence period, they would lose their earnest money. There’s also a possibility that the seller sues the buyer to force the home sale, Mancini added.