What Happens if You Break a Home Purchase Agreement?

5 minutes read

A home purchase agreement is put in place to protect the buyer and the seller. It helps the seller make sure they get the money they deserve after taking the home off the market for you while you get your affairs in order. It helps the buyer by giving you time to back out of the contract should you find a reason to do so if something comes up that you don’t like. It also protects you, the buyer, from any fraudulent activity from the seller. The contract is legally binding and if you back out after your “free period” to do so, you could end up paying a serious consequence in the form of money.


When you create a home purchase agreement, it is best to have an attorney with you. This way he can make sure you have all of the appropriate contingencies listed. This is not to say the seller and his attorney will agree to every single contingency, but it is worth a try.

Typically, home purchase contracts have contingencies pertaining to some or all of the following:

  • The appraisal – If the appraisal does not come back at the value you agreed to purchase the home, you may want to back out of the purchase.
  • Home inspection – If the home inspection report comes back with some serious issues with the house, such as a cracked foundation or mold growth, you may want to cancel your purchase. The inspector will help you determine how serious the issues are and if you should worry about them.
  • The home loan – If you cannot secure financing for one reason or another, you need to be able to back out of the contract without consequences.
  • Selling your current home – If you still have to sell your current home, you may not be able to afford your home and the new home. The housing contingency allows you to back out of the home purchase if your home does not sell by a particular date.

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You might wonder why a seller would accept such contingencies. There are so many ways for the buyer to get out of the contract. Typically, sellers will pick and choose what they are willing to accept. If, for example, a seller is hard pressed to move, they may not accept an offer with a housing contingency as that is too risky for them. The buyer has too many ways to back out of the contract. Some sellers, however, may accept other contingencies, but negotiate the bid slightly higher in order to make up for the risk they take.


One way buyers guarantee their spot as a top bidder is to offer earnest money. Usually, 1% of the purchase price suffices, but every sale is different. This earnest money goes directly towards your down payment when you close on the home. However, it also serves as a bargaining tool to help keep you in the home purchase agreement. If you don’t close on the home, you may lose the money unless you are within one of the agreed upon contingencies.


There are several ways you can cancel the home purchase agreement. Here are some examples:

  • The appraisal comes back $25,000 lower than the agreed upon sales price. You don’t have the ability to put up the extra $25,000, which means your financing falls through. Whether you had an appraisal or financing contingency, you have the ability to get out of the contract without any consequences. The seller is then free to put the house back on the market at the appropriate price based on the latest appraisal.
  • The home inspection comes back with some serious bad news. You are not sure what the inspector is even talking about and the seller refuses to negotiate the price or to fix the problems before you close on the home. If you decide to back out of the contract and you have a home inspection contingency, you will not have consequences for canceling the sale.
  • Your current home has a contract on it and is supposed to close weeks before you close on your new home. Unfortunately, the sale falls through because the buyers could not secure their financing. Now you have your home back on the market. If you had a housing contingency on the contract, you have the option to back out of the purchase without any issues.

Now, let’s say you passed all of the dates for the above contingencies and everything is moving along just fine. One day, however, you decide you just don’t want to purchase the home. It is not in the right neighborhood or you met the neighbors the other day and you don’t get along. Because you are outside of any contingency dates, you do not have any protection fi you back out. Deciding not to purchase the home any longer will result in the loss of your earnest money deposit. If you put the traditional 1% down for the deposit and you were buying the home for $250,000, you could be out $2,500.

Whether you want to back out of a home purchase agreement depends on how much money you can stand to lose. If $2,500 is not a lot to you or you would rather sacrifice the money than live in the home, then you are free to do so. However, most attorneys recommend their clients really think through a purchase and make sure they want it no matter what comes up down the road. The attorney makes sure the right contingencies are in place, but they cannot protect you if you just decide for no apparent reason that you no longer want to purchase the home. Before you put any money down, consider all aspects of owning the home so that you can avoid making a very expensive mistake down the road.

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