What Happens When You Back Out of a Home Purchase Contract?

When you close on a mortgage loan, you're generally required to put down some amount of money. This is known as your down payment.

But that's not the only cash you might have to fork over when buying a home. When you make an offer on a home, you're generally required to put down a deposit to let the seller know your offer is a serious one. This is often referred to as earnest money.

Earnest money typically amounts to 1% to 3% of the purchase price of a home, according to Rocket Mortgage. So if you're buying a $400,000 home, you may need to offer up a deposit of $4,000 to $12,000. That money is then held in an escrow account and applied to your home purchase once your loan is finalized.

But the reason you need to pay it upfront is that once a seller accepts your offer, their home is taken off the market. If you were to back out, it could leave your seller in a jam.

What happens if you do decide to back out of a home purchase contract? Will you automatically have to forfeit your earnest money? The answer is, it really depends.

It's all about your reasoning and contract

You may get cold feet about buying a home at some point after making an offer and decide to back out. Or you might find a different home that's a better fit for you and back out for that reason.

In these situations, you generally risk losing your earnest money. A seller might, in that case, agree to give you your deposit back if they're able to easily re-list their home and get a comparable offer, but they won't be obligated to do so.

On the other hand, most home purchase contracts have a home inspection contingency clause that states that if issues are uncovered during the inspection, and the seller isn't willing to address them, then the buyer has the right to back out of the purchase penalty-free. If your contract has this clause, you may be protected if you choose to withdraw your offer due to unforeseen problems with the home you're buying.

Let's say a home inspection reveals that the home you want to buy isn't up to the current electrical code. That could not only be a costly issue to fix, but a dangerous one to deal with. If your seller isn't willing or able to pay to have the home brought up to code, then you can generally back out of the deal and get your earnest money returned to you if your contract has a home inspection contingency written into it.

Make sure you're committed before making an offer

While there are circumstances when you can get your deposit back after withdrawing an offer to purchase a home, you usually can't get your money back due to simply changing your mind. So before you make an offer to buy a home, make certain the property in question is really the one you want. And also, get a good real estate lawyer to review your home purchase contract and ensure that it contains the protections you need.