Can I Back Out of Buying a House Before Closing?

Sometimes new information or changes in circumstances come up which affect your ability or willingness to carry through with buying a home, even after all parties have already signed the purchase agreement.

When that happens, you may wonder, “Can I back out of buying a house before closing?" The answer is yes - but there are costs to doing so.

When is it OK to back out of buying a house?

Technically speaking, you can back out of buying a house at any point before signing loan documents and title documents that assign ownership, though as we'll discuss below, there are costs and effectively a penalty to doing so beyond certain points.

You can back out of buying a house either 1) before all contingencies are removed, and 2) after all contingencies are removed.

1) As we've explained before, many purchase contracts come with contingencies, the most common of which are inspection, appraisal, and loan contingencies. They are designed to protect the buyer by allowing them a specified amount of time to conduct additional inspections and/or confirm their funding. If there is no issue, each contingency is removed or cleared. For clarity among all parties, the seller's agent will ask you to affirmatively remove the contingencies upon the deadline. In some competitive markets, buyers will preemptively remove contingencies in their offer, effectively presenting to the seller that their loan will not fall through (if they remove the loan contingency) or that they will accept the home as disclosed (if they waive inspection contingencies). If an inspection turns up a deal-breaker, the property fails to appraise, or the loan falls through, the relevant contingency allows the buyer to walk away without any penalty, meaning they are able to retain the deposit they paid (which we will discuss in more detail below).

2) If a buyer ends up cancelling a transaction for a reason after their contingency period expires, they are considered in breach of contract, because otherwise the contract would have gone forward. (For example, cancelling the sale because of a pest inspection report a couple days after they had removed the inspection contingency, or cancelling a sale because the property did not appraise, even though they had removed the appraisal contingency.) In this case, the seller is entitled to claim the deposit paid to escrow.

What's an earnest money deposit?

We've mentioned the deposit (often referred to as earnest money, or an earnest money deposit, abbreviated as "EMD") a couple of times earlier, and that the buyer gives this up if they cancel a contract outside of contingencies. What is this earnest money deposit, and why does the seller get to keep it?

Preparing a house to go on the market is time and cost-consuming, and no seller wants to enter into contract with a buyer, only to see them pull out after a few weeks. The time under contract turns into wasted time, the seller now needs to pay for several more weeks worth of property taxes or existing mortgage they were not planning to, and the market may have shifted against the buyer during that period. Additionally, the home will have a listing record showing that it went into contract but the sale was terminated. Some cautious buyers may be predisposed to think there might have been an issue with the home, which may depress interest in the house when it comes back on the market.

For these reasons, it is customary for a buyer to show their good faith, or express their earnestness, by making a deposit which the seller is able to claim if the buyer fails to perform and complete their side of the contract. Think of it as a form of insurance for the seller.

The earnest money deposit is usually paid to the escrow company that is handling the transaction, and is counted as part of the down payment. (e.g., if you made a $10,000 deposit on a home with a $30,000 down payment, you will need to provide an additional $20,000 for the down payment at closing.) This amount can vary by market; in some locations it is a standard amount; in other markets it is a certain percentage of the purchase price. Some buyers will pay a larger deposit in order to make their offer more competitive since hypothetically speaking, if the transaction were to fall through after contingencies have been cleared, the seller would be able to claim a larger amount of money than if an offer with a smaller EMD were to fall through.

What's the downside to backing out of buying a house after going into contract?

Putting all of this together, the downside of backing out of buying a house is determined by when you do so. If you back out before you remove contingencies, you will have lost time, emotional energy, and any money you may have spent on inspections, but you will at least be able to keep your earnest money deposit. However, if you pull out after the contingencies have been removed, you will not only lose out on time and energy, you will also likely lose your deposit, which may make up a significant portion of your down payment funds.

READ NEXT: Who Pays the Realtor Fees?

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