It’s not uncommon for homebuyers to get anxious when it’s time to sign the papers that make their mortgage loan official. Taking on a monthly mortgage payment is a serious financial responsibility.
But what happens when a case of cold feet becomes more serious? As closing day nears, what if borrowers decide that buying a home and taking on a mortgage loan is not the right financial move for them?
That can become expensive. Backing away from a mortgage at the last minute can cost borrowers thousands of dollars, which is why mortgage professionals say that borrowers should be absolutely certain that they can comfortably afford their new mortgage payments.
Can a Buyer Back Out of an Accepted Offer on a House?
Yes, a buyer can typically back out of buying a house after the seller has accepted their offer. Most purchase agreements include contingencies, which allow buyers to back out of a home sale if certain conditions aren’t met.
For instance, the contract will typically allow an earnest money refund if serious problems are discovered during a home inspection, or the borrowers fail to qualify for a mortgage. In this case, the buyer’s earnest money would be refunded.
After you make an offer on a home and the sellers accept it, you’ll typically have to deposit what is known as “earnest money.” Earnest money is a way for buyers to show that they are serious about buying a home, and it provides a financial safety net for sellers who are now taking their homes off the market and shutting off any possible new offers.
If the buyer backs out due to cold feet, the odds are high that they will lose most or all of their earnest money and possibly face legal action from the seller.
After Signing Closing Papers
Once you sign the mortgage papers at the closing table, you can no longer back out of the deal and your new monthly payments.
But even if you are sitting at the closing table, you don’t have to sign the closing documents. However, if you back away that late in the process, the odds are high that you’ll lose your earnest money.
How much that earnest money you pay depends on the sales contract you and the seller signed. In some markets, buyers put down 1% to 2% of the home’s sales price as earnest money. In others, putting down 3% to 5% might be standard.
If the home’s final sales price is $350,000, you risk losing $3,500 to $17,500 in earnest money if you back out of your purchase.
Refinancing and the Right of Rescission
There are two cases in which borrowers can back out of a real estate transaction after signing closing papers: when you are refinancing or taking out a home equity loan.
Federal law gives borrowers what is known as the “right of rescission.” This right gives borrowers three business days to back a home equity loan or refinance after signing closing papers.
There are no clear guidelines to exercise the right of rescission. However, drafting a written notice stating your intention to cancel the contract or loan is customary. It’s crucial to act promptly and precisely within the stipulated time frame to effectively exercise the right of rescission. If there’s any uncertainty or confusion, seek guidance from your lender or a real estate attorney.
As a rule of thumb, you have every right to leave a home offer without signing, but once you do, you’ll need to respect the contract and its repayment obligations. Unplanned circumstances can hamper your homebuying plans, but otherwise, make sure you’re prepared to take on the responsibility of owning.