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Most people who make an offer to buy a home do so fully intending to see the deal through to completion. But things happen, and home purchase agreements occasionally fall through.
Rising interest rates, affordability challenges, and even problems with the home itself can make the purchase less attractive than when you initially decided you wanted it. But before backing out of your contract, it's important to understand the potential financial and legal consequences you may face if you do.
Both the buyer and the seller can back out of a home purchase agreement, though buyers usually have more options. How easy it is to back out of a purchase agreement typically depends on the wording used in the contract.
There also may be legal and financial consequences to canceling a real estate contract. For instance, you risk losing your earnest money unless there are contingencies in place that protect you.
See below for the three legal grounds for contract cancellation in real estate.
If you and the seller both mutually agree to cancel the contract, you may be able to legally dissolve it unscathed.
Depending on what the issue is, you might also consider renegotiating with the seller and revising the contract to better meet both parties' needs. You can do this with the help of your agent or a real estate attorney.
Contingencies are the key to recovering earnest money after cancellation. These clauses are a type of "out" clause built into your contract, allowing you to withdraw if certain conditions aren't met.
The following contingencies are commonly included in a home purchase contract and would allow you to back out of your deal without consequence:
You can also cancel due to a breach of contract in real estate deals, meaning the other party fails to meet their obligations as outlined in your signed agreement. For example, say the seller fails to let your home inspector in the home, even though you included an inspection contingency in the contract. In this case, you would have legal grounds to cancel the contract.
Again, this would be something you'd want to discuss with your agent or attorney.
The exact process for canceling a real estate contract will depend on what state you're located in. An attorney can help you determine the best path forward if you need to cancel your contract, but generally, you'll start by:
First, you'll want to go over your contract with our agent in detail. Make sure the proper provisions are in place for you to cancel the contract. Do you have the right contingencies in place? Are you still within the time period you can cancel based on that contingency? Talk to your agent or attorney for help better understanding the nuances of your contract.
If you've officially decided to move forward with the cancellation, it's time to put it in writing and send it to the other party. When writing this letter, make sure to include the date the contract was drafted, the address of the home, the date of cancellation, and your reasons.
Depending on what state you live in, there may be a specific form you'll need to cancel the contract, too.
If you cancel a real estate contract without the proper provisions in your contract, you'll face consequences — potentially financial and legal ones. See below for what these might look like.
If you pull out of a contract and don't have the right contingency in place, you'll forfeit any earnest money you put down on the home. This amount varies based on market and home price, but it usually comes to 1 to 3% of the home price.
You'll also lose any money you've already spent on services like a title search or home inspection.
You could also face litigation if you cancel a contract without legal grounds. Sellers could also seek financial damages against you, as it could result in a lower sale price and other issues.
"The financial consequences of having to go back on the market are unknown," says Hayley Tomazic, real estate broker and founder of Curated Properties. "They may not attract the same amount of interest after returning and secure a lower sale price with worse terms."
Contingency clauses are the best way to ensure you have a way out of a contract without forfeiting any cash. Here's what to know about the three most common real estate contract contingency rights.
One reason contracts are often canceled is because of a failed home inspection.
"If the buyer finds something material regarding the home such as a structural deficiency they were unaware of, they may choose to cancel," she explains.
With a home inspection contingency in place, buyers have the right to cancel the contract based on what their home inspector finds. They might also renegotiate with the seller, requesting issues be repaired before closing or, in many cases, that the seller offer credits toward closing (thereby giving the buyer money to do the repairs themselves.)
Financing contingencies are for use if you plan to get a mortgage loan. If you have a problem getting a mortgage — or getting one big enough for the purchase — this contingency allows you to back out of the transaction without losing your earnest money.
This might happen if you lose your job prior to closing on your loan or if your lender finds something on your credit report that makes you ineligible.
Mortgage lenders will only give you what a home is worth, so if the home you're buying appraises for lower than your offer, you've got a problem. The appraisal contingency is a fallback should this occur. With one of these in place, you can negotiate your offer with the seller (to match the appraised value), make up the difference between the two numbers out of pocket, or withdraw from the sale contract altogether.
Canceling the contract is just one step in the process. To protect yourself, you should also focus on:
Get everything in writing, and make sure your agent or real estate attorney is CC'ed on all correspondence. This will give you a paper trail and evidence should you face litigation (or sue the other party yourself) later on.
You should also talk to your agent about how to better formulate your contract on the next go-around. If you're still hunting for a home, what can you do to prevent similar issues from derailing the deal next time? And if you're selling, what proactive measures can you take to keep the next transaction on track?
Can I cancel a real estate contract at any time? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
Whether you can cancel a contract depends on the terms within the agreement and the laws governing real estate transactions in your state. Mutual consent, contingencies, or a breach of contract are typically grounds for cancellation.
What happens to my earnest money if I cancel the contract? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
Typically, if you cancel within the terms of a contingency, you may be entitled to a refund on your earnest money. If you cancel without the property contingency in place, you'll likely forfeit that money and the seller will keep it.
Are there any penalties for canceling a real estate contract? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
Besides the potential loss of your earnest money, additional penalties can include being sued for breach of contract or having to compensate the other party for their losses and expenses.
How do I properly notify parties of my intention to cancel? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
Notification should be in writing and adhere to the methods outlined in the contract, ensuring that you provide notice within any specified timeframes. You can ask your agent for help in writing a contract cancellation letter.
Can I cancel a contract after removing contingencies? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
Canceling a contract after removing contingencies typically exposes you to greater risk, including the loss of earnest money and potential legal action, unless another valid legal ground for cancellation exists.
Jamie Johnson is a Kansas City-based personal finance writer whose work has been featured on several of the top finance and business sites in the country, including Insider, Credit Karma, Bankrate, Rocket Mortgage, Fox Business, Quicken Loans, and The Balance. For the past five years, she's dedicated more than 10,000 hours of research and writing to more than 2,000 articles about personal finance topics.
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