When Is It Too Late to Back Out of Buying a House?
Can a Buyer Back Out Before Closing? Yes!
Walking away from a closing happens more often in buyer's markets than in seller's markets. Some buyers become frightened when prices seem to be too soft, when they should be jumping with joy, and others are afraid of further declines in the market.
Other factors can come into play as well, regardless of the market. The fear usually begins to set in right after the purchase offer is accepted. Full-blown panic tends to set a day or two before closing, and buyers might be inclined to pull the plug. A buyer can back out of a purchase agreement, but it will usually hit them where it hurts—right in the bank account.
Contract Contingencies: A Way Out
Well-written purchase offers almost always include contract contingencies—items and terms that must be met or removed within certain periods of time, usually 10 to 18 calendar days. A contingency is a qualifier of sorts. It's like saying, "Yes, I'll follow through and buy your home, unless..."
Some contingencies are pretty common. They might include:
- That the property passes inspection
- That the buyer is approved for financing
- That the property appraises at an acceptable value
- That the buyer can sell their existing home
- The buyer being approved for financing
A poor inspection report can indicate that pricey repairs are on the horizon and their request for repairs isn't granted, or that something else goes wrong with the home that they don't discover until a final walk-through inspection. A low appraisal can affect financing so a buyer would be unable to borrow enough to purchase the home through no fault of their own.
It's not reasonable to insist that a buyer go through with the purchase in any of these circumstances.
There are deadlines by which these conditions must be met, and a buyer is absolutely entitled to walk away if one or more are not.
The Buyer Gets Cold Feet
Buyers sometimes don't walk away until the last minute. The reality of paying a mortgage, interest, and property taxes and the costs of maintenance might hit them at the eleventh hour. They might decide that they just don't want to tie themselves down like that after all.
Ideally, this will happen early in the process, but sometimes the initial dread doesn't dissipate with time.
Problems With Financing
Last-minute problems with financing can crop up after the contingency period has passed. A lender might issue a loan preapproval letter to the buyer, but this doesn't mean that it will definitely give the buyer financing.
Buyers can face underwriting stipulations that they can't perform after the loan contingencies are removed. An experienced loan officer can fix many conditions for loan approval in advance and save the day, but not all loan officers are that adept.
The Buyer Finds Something Better
A buyer might keep looking at homes and going to open houses after committing to buying, and another home might turn into their dream home in the blink of an eye. This can mean goodbye to the first "dream home" and hello to the second.
Unexpected job transfers, sudden pay cuts or demotions, an out-of-the-blue divorce or marital troubles, a serious illness, or any number of other circumstances can cause buyers to do an about-face on the brink of closing.
Sometimes the situation has nothing to do with the buyer's whims or qualifications. The home itself could be destroyed in a tornado, hurricane, earthquake, or flood, or at least it might suffer enough damage to affect the sale. Any number of natural disasters can create havoc and render a home uninhabitable.
Most buyers would walk away under these circumstances, and rightly so.
The Results of Walking Away
A buyer's earnest money deposit, sometimes referred to as a "good faith" deposit, is money put down toward the purchase at the time the buyer makes an offer on a home. All earnest money deposits are negotiable. It's not unusual for a seller to accept $1,000 as a deposit on a $500,000 home, but the higher the deposit, the more money the buyer has at risk under the provisions for liquidated damages.
Earnest money is often at risk after contingencies have been released from the contract. Some contracts call for liquidated damages in the event of default after contingencies have been removed. Liquidated damages in a real estate transaction usually equal the earnest money deposit for the buyer.
The money the seller receives for the buyer's default is often limited to the actual deposit on hand if both parties have contractually agreed to liquidated damages. A seller might be free to sue for actual damages, which could exceed the deposit, when liquidated damages aren't provided for in the contract.
Buyers who want to walk away will often forfeit their deposit. A thousand dollars might not be substantial enough to force the buyer to follow through and close. Please consult with a real estate lawyer if you find yourself in a position where you want to walk away from a real estate purchase at the eleventh hour for any reason.
California Department of Veterans Affairs. "Home Buying Process." Accessed April 13, 2020.
Consumer Financial Protection Bureau. "Schedule a Home Inspection." Accessed April 13, 2020.
Consumer Financial Protection Bureau. "My Appraisal Is Less Than the Sale Price. What Does That Mean for Me?" Accessed April 16, 2020.
Navy Federal Credit Union. "What Is a Preapproval?" Accessed April 13, 2020.
HUD.gov. "Common Questions From First-Time Homebuyers." Accessed April 16, 2020.
North Carolina Real Estate Commission. "Questions and Answers on Earnest Money Deposits," Page 1. Accessed April 13, 2020.
Washington State Legislature. "RCW 64.04.005 Liquidated Damages." Accessed April 13, 2020.