Q: I have a contract on a home to purchase, but I have changed my mind. Can I back out prior to the closing without any penalty or repercussions?

A: That, as it so often does, depends. First: the formalities. Depending on your state, it’s highly likely that the real estate purchase contract you signed offers some sort of an out, with conditions. In some states, these are known as contingencies — basically, contractual provisions that allow the buyer to back out of the deal within a set number of days.

These provisions usually also give the buyer the access and opportunity to have the property inspected and appraised, to have her loan underwritten, and to undo the deal, without penalty, if her loan is not approved or the property condition does not meet her standards within the agreed-upon contingency period (usually around two weeks, plus or minus a couple of days, by default, but the time period itself is fully negotiable between buyer and seller).

In other states, the relevant provisions provide an objection period in which the buyer must voice her objections or intent to back out, or forever hold her peace.

At the end of an objection period, a buyer usually retains the right to back out, but will forfeit any earnest money deposit she placed on the property if she bails. At the end of a contingency period, the buyer must either:

  • remove the contingency, signaling that she plans to close the deal, and rendering her deposit nonrefundable if she doesn’t;
  • exercise the contingency, killing the deal; or
  • request an extension of the contingency until her outstanding due diligence is complete.

Those are the basics, but there are two important caveats if you happen to be buying a distressed property. If you’re in contract on a short sale, your contingency or objection period likely doesn’t even begin to elapse until you’ve received the bank’s approval of the deal.

If you change your mind before that happens, chances are good that you can back out, penalty-free.

On the flip side, if you’re in contract to buy a bank-owned property and you’re in a contingency state, chances are good that the bank has effectively converted the contingency period into an objection period, so that your deposit becomes instantly nonrefundable if you haven’t backed out of the deal by the end of your contingency period.

Hopefully, you know where your own contract falls within the above schemes. If not, check with your agent or attorney to understand whether you can actually back out, under the terms of your contract with the seller, without penalty.

With that said, just because you can back out doesn’t mean you should. Buying a home is sort of like getting married in that anyone who takes it seriously will have a moment (or day, or week!) of doubt.

If the fact that a few thousand dollars’ penalty would sway your decision in favor of moving forward with the transaction, that might be a sign that your desire to back out is just buyer’s remorse.

Alternatively, if you’re in contract on a short sale you’re not sure actually can or will close and you happen to have found another property you like better, at the right price, that is more certain to close (i.e., is not a short sale), your change of mind might make more sense.

The inevitability of buyer’s remorse at the prospect of such a major commitment as a mortgage is why I suggest buyers-to-be actually write down their "visions of home," getting clear on what they want their lives to look like on a daily basis once they own the home they envision, and determining what characteristics, features and amenities a home would need to have to facilitate that vision.

When buyer’s remorse rears its head, it can be a useful exercise to revisit any written documentation you have of your original wants, needs, priorities or vision; compare the home against that; and use the comparison to quell any emotional freak-outs that might incline you to back out irrationally, or supply logic and reason to a rational decision to cancel the contract.

Finally, if a serious problem with your job, loan, health or life is what’s making you want to back out, it might make sense to cancel the contract even if you will incur a penalty for doing so.

I’ve personally worked with buyers whose marriages broke up or jobs were lost during escrow, but after removing their contingencies they were happy to leave the transaction and forfeit their deposit knowing that doing so allowed them to escape the greater evil of being stuck with a home and a mortgage that is simply not going to work with their changed circumstances.

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