What Does Being ‘Under Contract’ Mean?
The term “under contract” in real estate means a buyer and seller have agreed to a home sale in writing. We’ll explore what happens when a home is under contract, as well as how you can back out once you’ve signed on the dotted line.
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What does it mean to be ‘under contract’?
In real estate, a home is under contract when a buyer and seller have signed and dated a legal document to purchase a home. The written agreement provides details about both parties and the property being purchased, along with a breakdown of the price and costs involved in the transaction.
Once everyone signs the contract, they are bound by law to follow the terms of that agreement. Sometimes the term “contingent” is used when referring to a home that’s under contract. That simply means there are certain conditions or “contingencies” that must be met for the sale to be completed.
Under contract vs. pending sale: How they’re different
When you’re house hunting, you may notice the words “contingent,” “under contract” or “pending” on the real estate listing. As a buyer, there are some important differences between these terms that may guide your decision about whether to keep an eye on the home if the sale falls through.
Under contract/contingent. A home listing with either of these statuses means there’s still a chance you could buy the home, since the current buyer and seller are still working through conditions in the contract. For example, if there’s an inspection contingency, the buyer could back out if the home inspection reveals problems that the seller isn’t willing to fix. Once the house goes back on the market, you could then swoop in and buy it.
Pending. If a home sale is pending, the buyer has either made an offer with no contingencies or signed off on them. While there is a chance the deal could fall through on a financing contingency if the buyer’s mortgage is denied, more than likely you’ll need to continue your house hunt.
How contingencies affect a house that’s under contract
A signed purchase contract contains legal language and timelines that all the parties will need to be aware of. Contingencies give buyers and sellers a way to back out of a contract — if either party can’t satisfy a condition laid out in the contract, they have the right to negotiate the contract terms or cancel it. The most common contingencies involve inspections, home appraisals and financing.
Inspection contingencies
The home inspection contingency is probably one of the most important contingencies for homebuyers. During a time period that usually ranges between three and 14 days, a buyer can hire inspectors to check all the components of a home — from the roof to the foundation — to ensure they’re in good working order.
Some types of financing require specific inspections. For example, VA lenders require termite reports in parts of the country where the wood-eating insects are common.
Appraisal contingencies
A home appraisal is typically required if the buyer is taking out a mortgage to purchase a home. A licensed professional appraiser compares the features of the home to similar homes in nearby neighborhoods to determine whether the home’s value supports the sales price. If it does, then the appraisal contingency is met.
If the appraised value comes in low, the buyer can pay the difference, ask the seller to reduce the price or cancel the contract.
Mortgage financing contingencies
Unless you have the cash to buy a home, you’ll probably need a mortgage financing contingency when you make a purchase offer. The contingency needs to provide details about the type of mortgage you’re applying for, including the terms and timeline for providing proof that you’ve been approved for the loan.
The financing contingency gives you an out if your loan falls through without risking the loss of any upfront earnest money you paid. While that’s a benefit for buyers, some sellers may prefer cash-only offers to reduce the chance that a buyer’s financing could fall through.
Home sale contingencies
Buyers who are juggling the sale of their current home while also trying to buy a new home can protect themselves with a home sale contingency. But while it’s a good strategy for buyers that need extra time to sell their home, sellers may reject an offer that includes this contingency if they need a quick sale and don’t want to take the risk that your current home doesn’t sell and they’re stuck remarketing their home.
Can a buyer back out once they’re under contract?
Yes, under certain circumstances. Inspection, appraisal, financing and home sale contingencies give buyers a legal way to cancel a contract without losing any upfront money or facing consequences. However, there are also some less common scenarios where a buyer might be able to bail out of a purchase contract.
The buyer adds an attorney review clause. Local laws may allow a buyer to back out of a contract without penalty if they decide to cancel after it’s reviewed by a real estate attorney. The review period is typically three business days in this scenario.
The title to the property isn’t transferable. If a title search uncovers problems that could affect your ownership of the home — such as unpaid contractor liens or property tax bills — the sale could be canceled if the seller can’t provide a clear title.
What happens if you breach a real estate contract?
If a buyer or seller decides to walk away from a contract, either party could be sued if they didn’t follow the contract terms when canceling. A breach of contract lawsuit could result in costly legal battles that could result in:
- Either the buyer or seller paying money damages
- The seller returning a buyer’s earnest deposit
- The buyer and seller completing a court-ordered home sale