Valid Reasons to Back Out of Buying a House

If you have signed a purchase agreement on a new home, you’re probably excited. Most people enter a home purchase with the mindset that they will follow through with the purchase. However, circumstances can arise, and there are valid reasons to back out of buying a house.

When buying a house, either as a primary residence or as an investment property, it’s important to know the valid situations when you can (and potentially should) back out of the contract without losing or impacting your earnest money deposit. Contingencies are conditions written into a purchase agreement that must be met before the sale proceeds. They are designed to protect buyers and their lenders from making a bad investment.

This article will discuss when you should consider backing out of a home purchase. Learn the valid reasons for ending a deal and how to properly back out of a real estate purchase.

Home Inspection Issues

Buyers who include an inspection contingency can back out of buying a house if major issues are uncovered during the inspection. The condition under which the buyer can stop the purchase depends on the terms outlined in the purchase agreement. However, an inspection contingency generally will cover common undisclosed issues that lead to big-ticket repairs. If any of these issues are found, the buyer can negotiate terms or repairs with the seller or decide not to proceed.

Buyers should remember that if a seller discloses a problem with a property in their disclosure documents, that problem, when uncovered during an inspection, is not considered a valid reason to cancel the sale.

When major issues are found during a home inspection, the seller can offer to make repairs or offer a financial credit. However, a buyer is not automatically obligated to purchase the house even if the seller offers to make the repairs. If the seller agrees to make the repairs, they must be completed in a workmanlike manner and often need to be re-inspected by the buyer.

If the buyer is not satisfied with the inspection results, the negotiated repairs, or the seller’s response, they typically have the right to back out of the contract without penalty during the inspection contingency period. This right should be explicitly stated in the purchase agreement.

The buyer’s obligation to purchase depends on their satisfaction with the inspection results, the quality of the repairs, and any negotiations or agreements reached during the contingency period.

Undisclosed Structural Problems

Structural problems in a home can lead to repair bills ranging from a few thousand dollars to hundreds of thousands. Furthermore, they can signal that other defects in the property might be found when construction begins.

Signs of foundation or structural issues include:

• Significant cracks in the foundation.
• Uneven floors.
• Evidence of foundation settlement.
• Leaking or aged roof with missing shingles.

When a home inspection finds significant structural problems, it can give buyers a valid reason to back out of buying the home without losing their earnest money deposit.

Pest Infestation

A pest inspection can uncover hidden problems that can lead to costly repair bills. Evidence of termites or other pests can justify a buyer’s withdrawal from a contract if the infestation poses a significant risk to the property.

While an infestation can be small, if left unchecked, pests can cause:

• Structural damage to beams and insulation.
• Electrical damage, such as chewed and severed wires in walls.
• Decreased property value

Buyers may choose not to proceed with a purchase if there is a significant pest infestation, as there is often more damage than is visible. While the sellers can eliminate the pest problem, they may not make all the necessary repairs, leading to more problems and financial consequences for the buyer.

Safety Hazards

Safety hazards that are not disclosed to buyers before they sign a contract can be a valid reason to back out of a purchase. Buyers may not want to take on the project or incur the expense of fixing the safety issue.

Furthermore, many mortgage lenders and loan programs will not lend on a home with safety hazards.

Potential safety hazards include:

• Asbestos.
• Radon leakage.
• Unsafe electrical wiring.
• Toxic mold.
• Carbon monoxide or gas leak.

Buyers that proceed with a real estate purchase of a house with safety issues must first talk to their loan provider to ensure it won’t prevent them from securing financing.

Financing Contingency Problems

Securing financing can be one of the most difficult parts of buying a house, especially when interest rates are rapidly changing. A financing contingency is a clause that makes the homebuyer’s offer contingent upon financing. If the buyer cannot secure financing, a financing contingency allows them to cancel the contract and have their earnest money deposit refunded. Without this contingency, the buyer could forfeit their deposit if they fail to obtain a mortgage.

Buyers with an accepted offer with a financing contingency have almost always been pre-approved for a mortgage loan. However, that doesn’t guarantee that the lender will give them financing. Financing problems can occur while the house is in escrow, forcing a buyer to withdraw from a contract.

Mortgage Denial

Once a buyer has a signed contract on a home, they need to finalize their financing with their lender. This process usually involves the lender performing a home appraisal and thoroughly reviewing the buyer’s finances.

Some common reasons borrower financing falls through are:

• Poor Credit: Their credit score has dropped, or their credit report has changed since they were initially pre-approved, meaning that they are disqualified from obtaining a mortgage or have to pay a higher interest rate (and can’t get as high of a loan amount).
• Insufficient Income: If a buyer’s income has changed or is considered unstable, lenders may not approve financing.
• High Debt-to-Income Ratio (DTI): If a buyer’s DTI is high, they may not be approved for a loan. This can happen if a buyer has taken out a new loan or accumulated credit card debt in the time since they were pre-approved.
• Property Appraisal Issues: If the property being purchased appraises for less than the agreed-upon sale price, the lender may not approve the full loan amount needed to cover the purchase. Financing can fall through if the buyer doesn’t have additional funds to cover the difference.
• Safety Issues: Some loan programs, such as VA or USDA loans, require that the property being purchased is safe and habitable. If significant safety issues are uncovered during a home inspection, the lender will deny the mortgage, and the contract will fall through even if there isn’t a home inspection contingency.
• Rising Interest Rates: As interest rates rise, the cost of borrowing increases, leading to higher monthly mortgage payments. This can push a buyer’s potential mortgage payment beyond what they could afford when they were initially pre-approved. Therefore, they will get approved for a smaller loan amount, which may result in them no longer being able to afford the purchase price.

A mortgage loan denial is a valid reason to have to end a purchase agreement. Depending on market conditions and the seller’s motivation, buyers and sellers can look into alternative loan options or renegotiate the purchase price.

Change in Financial Situation

A sudden change in the buyer’s financial situation can be another valid reason to back out of a home purchase. Life events such as job loss, a significant reduction in income, unexpected medical expenses, or other unforeseen financial obligations can make it difficult or impossible for a buyer to proceed with the purchase.

If a buyer is no longer confident in their ability to afford the home due to a change in their financial circumstances, they should communicate this to their real estate agent and lender immediately. Depending on the terms of the home purchase contract and financing contingency, the buyer may be able to back out of the contract without losing their earnest money deposit.

Title Issues

A clear title is necessary to transact real estate; it gives the legal right to own, use, and sell the property. Any title issues can be a valid reason to back out of the purchase agreement under a title contingency in the purchase contract.

These problems can range from liens and easements to ownership disputes and property line discrepancies, all of which can complicate or even derail a real estate transaction.

Unclear Title

An unclear title can surface when existing liens, easements, or other encumbrances on the property are not disclosed. Liens are legal claims on a property due to unpaid debts, such as property taxes or contractor fees. Easements grant someone else the right to use part of the property for a specific purpose, such as a shared driveway or utility access.

When these issues are not disclosed and then uncovered during a title search, they can create legal complications and financial burdens for the buyer. If these problems are not resolved or are deemed too risky, they provide a legitimate basis for the buyer to back out of the deal without forfeiting their earnest money.

Disputed Ownership

Disputed ownership arises when there is uncertainty or legal contention over who actually owns the property. This could happen if there are conflicting claims to the property, such as a former spouse or heir challenging the sale, or if the current seller’s ownership is in question due to incomplete or inaccurate records.

Any ongoing legal disputes regarding the ownership can be significant enough to halt the transaction. No buyer wants to invest in a property that might come with the risk of future legal battles. Furthermore, if ownership is disputed, the individual who signed the purchase and sale agreement may not have the right to sell the property. If such a dispute surfaces, the buyer has every right to cancel the agreement to avoid becoming entangled in costly and time-consuming litigation.

Property Border Discrepancies

Property border discrepancies involve disagreements about the actual boundaries of the property being sold. For example, if a fence was erroneously placed over the border of a property onto the neighbor’s land, then it might be assumed that the covered land is included in a purchase. These issues can be revealed through a survey, showing that the property lines on paper do not match the actual boundaries on the ground.

Common property border issues might include encroachments, such as our previous example, where structures like fences or driveways extend beyond the property line or disputes with neighboring properties about where the boundary actually lies. Such discrepancies can lead to significant problems, especially if neighbors contest the property lines.

For a buyer, this uncertainty poses a risk to the use and value of the property unless both current owners come to a mutual agreement. Therefore, discovering a property border discrepancy is a valid reason to back out of buying a house, ensuring the buyer does not inherit a boundary dispute that could lead to future legal and financial consequences.

Low Appraisal Problems

A low appraisal can be a deal breaker in any real estate purchase. An appraisal is an independent assessment of a property’s market value conducted by a licensed appraiser. Lenders require an appraisal to ensure that the property’s value justifies the loan amount requested by the buyer. When the property’s appraised value comes in significantly lower than the agreed-upon purchase price, it can cause several issues that may warrant canceling the purchase agreement under the appraisal contingency.

Low appraisals can occur when comparable sales are lower than the fair market value buyers are willing to pay in a hot housing market. Alternatively, a low appraisal could signal that the market is cooling. Either way, a low appraisal should be a red flag for buyers.

If the appraisal is low, the lender will not approve the full loan amount needed to cover the purchase price. In such cases, the buyer is left with a few unappealing options:

• Come up with the difference and pay out of pocket.
• Renegotiate the price with the seller.
• Back out of the deal.

Many buyers are unwilling or unable to cover the shortfall, especially if the difference is substantial. Additionally, paying more for a home than it’s currently worth in the market is not a sound financial decision. An appraisal contingency allows the buyer to cancel a home purchase without losing their earnest money deposit or other financial consequences.

Unmet Contingencies

Contingencies are conditions written into a purchase agreement that must be met before the purchase and sale agreement is “unconditional,” meaning that the buyer is guaranteed to close or lose their earnest money.

Sale of Current Home

A home sale contingency is a provision in a real estate contract that makes the purchase of a new home contingent upon the sale of the buyer’s existing home. This contingency is particularly common when a buyer needs the proceeds from the sale of their current home to fund the purchase of a new one.

If the buyer’s current home does not sell within the specified timeframe, they can back out of the new home purchase without losing their earnest money deposit. This protects the buyer from overextending financially or becoming stuck owning two homes.

The failure to sell a current home can happen for various reasons, such as:

• Unfavorable market conditions
• The real estate agent’s marketing strategy not attracting the right buyers.
• Delays in closing the sale.

Whatever the reason, if the home sale contingency is not met, it prevents the buyer from moving forward with the purchase.

Repair or Improvement Contingencies

Repair or improvement contingencies are clauses in the purchase agreement that require the seller to complete specific repairs or improvements before the sale can close. These contingencies are often agreed upon after a home inspection reveals issues that need attention. The buyer and seller negotiate which repairs will be made, and these terms are included in a contract addendum. If the seller fails to complete the agreed-upon repairs or improvements to the buyer’s satisfaction, the buyer is not obligated to proceed with the purchase.

Failure to meet these contingencies can be an acceptable reason for a buyer to withdraw from a deal. For example, if a seller agrees to replace a leaky roof or replace outdated electrical wiring but fails to do so by the closing date, the buyer can cancel the contract under the repair contingency clause. This protects the buyer from taking on a property with unresolved issues that could result in additional costs or safety hazards.

Disclosure Issues

Sellers must disclose material information about the property’s condition and history. Disclosure issues happen when a seller fails to provide important details that could significantly affect the buyer’s decision to purchase.

When these undisclosed issues come to light, they can provide valid grounds for a buyer to back out of the deal. The two most common reasons disclosure issues lead to withdrawal from a purchase agreement are undisclosed property history and non-compliance with local laws.

Undisclosed Property History

The history of a property is important because certain events can cause ongoing problems. These issues include past flooding, fire damage, or other significant events, such as a violent death in a home. These issues are often hidden from plain sight but can severely impact the property’s structural integrity, safety, and value.

Even if the damage has been repaired, the property’s history can affect its resale value and insurability. If the seller did not disclose these issues, it is usually considered a breach of contract or even fraudulent misrepresentation. Under such circumstances, the buyer can back out of the agreement without losing their earnest money deposit.

Non-Compliance with Local Laws

Non-compliance with local zoning or building codes is another significant disclosure issue that can justify backing out of a purchase. For instance, if the buyer learns that an ADU on the property was built without the required permits, they might face hefty fines or make costly changes to bring the property up to code.

Similarly, if the property is zoned for a different use than intended or has encroachments that violate zoning laws, it can limit the buyer’s ability to use or modify the property as they wish.

If critical information about the property is withheld or misrepresented, backing out of the purchase is not only justified but often the most prudent course of action to avoid unforeseen liabilities.

Personal Circumstances

Sometimes, life throws unexpected curveballs that can affect a buyer’s ability or willingness to proceed with a home purchase. While these personal circumstances are not tied directly to the property’s condition or the terms of the sale, they can still be valid reasons for backing out of a real estate transaction.

Change in Personal Circumstances

A significant change in personal circumstances, such as a sudden health issue, a family emergency, or an unexpected job relocation, can make it impossible or impractical for a buyer to go through with a home purchase.

When such personal emergencies arise, it is crucial for the buyer to communicate promptly with their real estate agent and the seller. Depending on the terms of the contract and any contingencies included, the buyer may have the option to back out without forfeiting their earnest money deposit. In some cases, even if contingencies do not explicitly cover these circumstances, sellers may be understanding and agree to terminate the contract to avoid legal battles.

Buyer’s Remorse

Buyer’s remorse is a feeling of regret after making a significant purchase, and it can happen to some homebuyers. While not as concrete as other reasons for backing out, severe buyer’s remorse can sometimes push a buyer to reconsider their decision.

It is important to note that backing out due to buyer’s remorse can have legal and financial consequences. Unlike other reasons that contingencies might cover, buyer’s remorse is often not a legally protected reason for withdrawal. If a buyer decides to back out for this reason, they may risk losing their earnest money deposit or even facing legal action from the seller for breach of contract.

How to Properly Back Out of Buying a House

Deciding to back out of a home purchase is not a decision to be taken lightly. You need to know your legal rights and if you may face consequences for terminating the agreement. It starts by acting in good faith and quickly communicating with your real estate agent.

To properly back out of buying a house, follow these steps to ensure that the process is handled correctly and within the confines of the law.

Review the Purchase Agreement

A purchase agreement outlines the terms and conditions under which the buyer can legally withdraw from the contract without facing penalties. Contingencies and contingency periods may be in place that give most buyers the option to walk away from the deal.

Buyers should pay close attention to any time frames associated with these contingencies, as missing a deadline could result in forfeiting their right to withdraw without penalty. If there are any uncertainties or questions about the terms, consulting with a real estate attorney can provide clarity and guidance on the best course of action.

Communicate with Your Real Estate Agent

As soon as you decide to exit a real estate purchase agreement, you should notify your real estate agent. Your agent can help you determine whether or not contingency periods remain active. Furthermore, they are your intermediary between the seller and will be responsible for communicating with the seller’s representative.

Your agent can help draft a formal notice of cancellation of the purchase and sale agreement. This document must be sent to the seller or their agent, outlining the reasons for withdrawal and referencing the specific contingencies in the contract.

Legal and Financial Implications

Backing out of a home purchase can have significant legal and financial implications, depending on the circumstances and how the contract is structured. If the buyer backs out for a reason not covered by a contingency in the contract, they may risk losing their deposit. In some cases, if the seller believes the buyer is backing out without just cause, they may pursue legal action for breach of contract. This could lead to further financial penalties or even a court case.

If you are not protected by contingencies written into the contract but want to walk away from a home purchase agreement, you should speak with a real estate attorney. A lawyer can provide advice on the potential consequences of backing out. They can also assist in negotiating with the seller to reach a mutually agreeable resolution, if possible, to avoid litigation or financial loss.

Protect Your Interests with the Right Expertise

From discovering hidden defects and unmet contingencies to facing unforeseen personal circumstances, it’s crucial to understand the valid reasons to back out of buying a house. Buyers need to understand the contingencies in their purchase and sale agreement to protect their interests. However, knowing when and how to back out of a contract without legal or financial consequences isn’t straightforward, which is where an experienced real estate agent can make all the difference.

A knowledgeable agent will not only guide you through the process but will also help you understand contract terms. They provide invaluable guidance on contingencies, facilitate communications with the seller, and work alongside legal professionals to safeguard your earnest money and avoid costly mistakes.

To ensure you’re supported by the best in the business, start with FastExpert to find a top-rated real estate agent. FastExpert connects homebuyers with highly qualified agents committed to providing exceptional service. With over 50,000 agents in our network, FastExpert helps you search, compare, and hire the perfect agent for your needs. If you’re ready to find an expert who will prioritize your needs and guide you every step of the way, get searching with FastExpert today.