Most home buyers buying a new home have found THE HOUSE that suits them perfectly and have no intention of backing out of the deal, in fact, it is typically the opposite. Buyers will do everything possible to close on their new home. Still… you will see buyers back out of their contract for one reason or another. Getting your earnest money back is another story. In this post, we will explore 3 ways you can get out of a contract with your earnest money in hand.
Buying a new home is likely one of the biggest purchases you will ever make and signing a purchase contract IS a legally binding agreement. Now, the seller assumes you are buying their home in good faith and will do everything possible to follow through with your intent to purchase. With that said, as the buyer, you will want to have a contractual way out of the agreement in the event the home has structural issues, your ability to obtain a loan falls through or the appraisal comes in UNDER the agreed purchase price.
As the buyer, the first thing you want to do after you have a binding contract is to have the home inspected by a licensed home inspector. Most contracts will allow 10 days to complete the inspection, but we want to get it done as soon as possible. This time frame is called the Due diligence period.
Once you have completed the home inspection, you will have 3 options as outlined in the contract. Number one, you can furnish the seller a list of specific objections and immediately Terminate the agreement, with All earnest money returned back to you, the buyer.
Number two, AS the buyer you can accept the property in its present “As Is” condition and continue to purchase the property. In this case, the house only needs some cosmetic upgrades and you decide to pay out of pocket to keep the deal.
Three, you can provide a letter of items for the seller to repair or replace by a licensed professional only. A licensed professional will do everything up to code. If you choose number three, you will typically have 3 days to work out the details, once the work is done you will want to collect all the receipts of work completed and then personally inspect the home to make sure the work is finished. Option 3 is the most common option.
The next two contingencies in the real estate contract involve the MARKET VALUE of the home or better known as the appraisal, and the ability to obtain financing from the lender to purchase the home.
Just like the due diligence period, the clock starts on contingencies once we have a binding agreement, meaning all parties have signed the contract. You will be required to apply for a loan, assuming this is not an all-Cash Deal, within 3 days.
The purchase of your home is contingent on getting FINANCED for the agreed price and down payment. If you can show in good faith with supporting documents that you’re unable to obtain financing, THEN the buyer can terminate the agreement. The buyer is entitled to an earnest money return. An example of this would be a change in lending rates or tax rates that could drive up monthly payment cost before you close.
The last contingency involves the appraisal of the home. The bank will order an UNBIASED appraiser to determine the value of the home. The agreement is contingent upon the appraised value being EQUAL to or exceeding the agreed purchase price. The lender will not provide full funding if the appraised price is lower than the agreed price. In this scenario, the buyer either waive the appraisal and pay the difference in cash, or immediately terminate the agreement and receive earnest money back in full. Let’s look at an example… you buy the house for 325 thousand, and the appraiser appraises the home at 300 thousand. The bank will only loan you up to 300 thousand. You can either terminate the contract or choose to pay the extra 25 thousand in addition to the 300 thousand from the bank.
So, in summary, depending on the contract, you have three potential contingencies in the contract where you can terminate the agreement and receive your earnest money back.
