The Facts about Terminating a Real Estate Contract

You are not alone if you are a homebuyer who wants to back out of a purchase agreement. According to the latest data from Redfin 15% of home purchase agreements were canceled in June. This is an increase from the 11% of agreements that fell through this time last year.

There is a reason why homebuyers are canceling their transactions lately. Some are put off by inflation, while others are concerned about paying higher mortgage interest rates. A few others are no longer eligible for the mortgage they were approved for due to increased interest rates and amortization costs.

However, before you join the list of buyers who walk away from a home purchase contract you should consider what it will cost you to do so. Then again, if you are about to sign a real estate purchase contract it is worth knowing the facts before you sign on the dotted line.

What Is A Home Purchase Contract?

The home purchase contract serves as a map for a real estate transaction. It is a legally binding contract that details all aspects of the real estate transaction. It typically includes the following information:

  • Buyer and seller details
  • Property specifics
  • The cost of the house
  • Financial details
  • Earnest money down payment.
  • Any contingencies and conditions which allow the buyer or seller to legally withdraw from the agreement.
  • Estimated Closing and possession dates.

The house is under contract if both the buyer and the seller agree to the terms and sign the home purchase agreement.

When Can You Back Out Of A Home Purchase?

In theory, you can cancel a home purchase at any time before signing the mortgage and title documents that transfer ownership. However, only certain circumstances will allow you to do so without a penalty.

The easiest way for a buyer to back out of a home purchase is unfulfilled contingencies. A home purchase contract will typically include the following contingencies:

  • Financing contingency: Allows you to cancel the transaction if your financing for a mortgage falls through.
  • Inspection contingency: This allows you to conduct inspections to see if there is anything wrong with the property that you were unaware of. If the home inspections reveal any issues, you can cancel the sale, ask the seller to make improvements, renegotiate the price, or just walk away.
  • Appraisal contingency: If a home does not appraise for the purchase price, you can walk away or negotiate with the seller.
  • Title contingency: Allows time for the title search to be completed to ensure the property is free of all liens except the current owner’s mortgage. You have grounds to walk away if the title search reveals any ownership issues.

What Happens If You Do Not Have A Compelling Reason To Terminate The Contract?

A home purchase contract is legally binding even if it is not a final purchase. If you back out of purchasing a house that is already under contract because you got cold feet, saw another house you like better, or are worried about the coming recession or rising mortgage rates you will certainly face legal and financial consequences.

To begin with, the seller has the legal right to sue you. A provision for liquidated damages may also be included in the contract. This means that if you back out of the contract, you will be required to pay the sellers a prearranged sum of money, which is usually the amount that is already in escrow.

However, it is best to consult with a real estate attorney because, in some states, the amount of a deposit that the seller can retain is limited to a certain percentage of the purchase price. You might be able to come up with a solution with the help of an attorney who is familiar with your local laws.

Another alternative to get out of your real estate contract if there are no legal options is to talk to the sellers! Describe your situation. They may decide to let you out of the contract simply because they understand your situation.


If you are thinking of making an offer on a house, you should include certain contingencies in the contract. Things happen, and real estate contracts fall through. So, even if you don’t see any reason to back out of the contract, you will have the legal protection to do so if necessary. When you prepare your offer letter, make sure to discuss any concerns you have with your Realtor.