What Happens When You Walk Away From a Home Purchase Contract?

Buying a home is one of the biggest financial decisions you’ll ever make. The process is exciting, but it’s also full of legal commitments. Once you’ve had an offer accepted and signed a purchase agreement, you’ve entered a legally binding contract. While life can be unpredictable and circumstances can change, deciding to walk away from that contract can have significant financial and legal consequences. This isn’t a simple matter of changing your mind—it’s a potential breach of contract with real repercussions.

As a mortgage lender for veterans and military families, we at VeteransLoans.com understand that the path to homeownership can have unexpected turns. Our goal is to empower you with knowledge so you can make the most informed decisions possible. In this guide, we’ll break down the consequences of walking away from a buyer’s contract, the critical role of your earnest money deposit, and how you can protect yourself from a breach of contract.

The Earnest Money Deposit: Your “Good Faith” Commitment

Before we dive into the consequences, let’s talk about the key player in this scenario: the earnest money deposit.

What is Earnest Money?

An earnest money deposit is a sum of money you, the buyer, put down to show the seller that you are serious about purchasing their home. Think of it as a “good faith” deposit. It’s not the same as a down payment. The down payment is the portion of the home price you pay at closing, whereas earnest money is paid upfront and is typically held in an escrow account by a third party, such as a title company or an attorney.

The amount of earnest money varies, but it’s usually between 1% and 3% of the home’s purchase price. In a competitive housing market, it might be higher to make your offer more attractive. This deposit essentially serves as a form of security for the seller. If the deal falls through, the seller may be entitled to keep this money as compensation for taking their house off the market and missing out on other potential offers.

What Happens to Your Earnest Money?

• At Closing: If everything goes smoothly and the sale closes, your earnest money is credited back to you. It’s typically applied toward your down payment or closing costs.
• If You Walk Away: This is where the risk comes in. If you back out of the deal for a reason not covered by the contract, you will almost certainly forfeit your earnest money deposit to the seller.

Losing this money can be a major financial setback. A $500,000 home with a 2% earnest money deposit means you could be out $10,000. It’s a powerful incentive to follow through with your commitment, but it also highlights why understanding your contract is so crucial.

The Breach of Contract: What It Means and Why It Matters

A real estate purchase agreement is a legally binding contract. When you sign it, you are promising to buy the home under the specified terms and conditions. If you fail to do so without a valid, pre-defined reason, you are in breach of that contract.

A breach of contract is a legal term, and it can open you up to more than just losing your earnest money. The seller could have grounds to sue you for damages they incurred as a result of your decision to back out.

What Could a Seller Sue for?

• Forfeiture of Earnest Money: This is the most common consequence. The contract will usually outline that in the event of a buyer’s breach, the seller has the right to keep the earnest money.
• Specific Performance: While rare, a seller could sue you for “specific performance.” This is a court order that would legally compel you to complete the purchase of the home. This is more likely in a declining market where the seller might struggle to find another buyer at the original price.
• Monetary Damages: The seller could also sue you to recover any financial losses they suffered. This could include the difference between your offer and the new, lower offer from a different buyer, as well as the costs of re-listing the property, staging fees, and other expenses.

These legal battles are not only stressful but can also be incredibly costly in terms of attorney fees and court costs, regardless of the outcome.

Your Safety Net: The Power of Contingencies

So, how do you protect yourself? The answer lies in the contract itself, specifically in clauses known as “contingencies.” Contingencies are conditions that must be met for the sale to go through. If a contingency isn’t satisfied, you have a legal right to walk away from the deal and get your earnest money back.

For a veteran or active-duty service member using a VA loan, certain contingencies are particularly important.

Common Buyer Contingencies:

• Financing Contingency: This is arguably the most critical for a buyer. It states that the purchase is contingent upon you securing a mortgage loan. If your loan falls through—for instance, if you don’t qualify or your financial situation changes—you can legally terminate the contract and get your earnest money back. This is a vital protection, especially in a fluctuating financial landscape.
• Home Inspection Contingency: This gives you a set period of time to have a professional inspection of the home. If the inspection reveals major issues, like a faulty foundation, severe roof damage, or mold, you can often negotiate with the seller for repairs or a price reduction. If an agreement can’t be reached, this contingency allows you to walk away without penalty.
• Appraisal Contingency: Lenders, including those offering VA loans, will require an appraisal to ensure the home’s value is at least equal to the purchase price. An appraisal contingency allows you to renegotiate the price or walk away if the home appraises for less than what you offered. This is particularly important for VA loans, as the VA requires the home to appraise for at least the sale price.
• Title Contingency: This ensures that the seller has the legal right to sell the property and that the title is free of any liens or disputes. If a title search uncovers a problem, this contingency provides an out.

Understanding these clauses is paramount. A signed contract without any contingencies is known as a “no-contingency” or “as-is” offer. In a highly competitive market, buyers might waive contingencies to make their offer stand out, but this is a very risky move that leaves you with little to no protection.

When Is It Too Late to Walk Away?

The closer you get to closing, the more difficult and costly it becomes to back out. The timelines for each contingency are specified in the contract. Once those deadlines pass, the contingencies are typically “released,” and you lose your legal right to terminate the contract based on those conditions.

For example, if your inspection contingency gives you 10 days to get an inspection and you wait until day 11 to notify the seller of issues, you may have already lost your right to walk away.

The Bottom Line: Be Prepared, Not Impulsive

Deciding to walk away from a home purchase contract is not a decision to be taken lightly. It can have severe financial consequences, from losing your earnest money deposit to facing a lawsuit. The key to navigating this process is to be prepared from the very beginning.

• Read Everything Carefully: Before you sign a contract, read it in its entirety. Understand every clause, deadline, and contingency. Don’t be afraid to ask your real estate agent or a real estate attorney to explain anything you don’t understand.
• Leverage Contingencies: Make sure your offer includes the necessary contingencies to protect your interests. This is your insurance policy.
• Get Pre-Approved: Before you even start house hunting, get a solid mortgage pre-approval. This step not only gives you a clear budget but also shows sellers that you’re a serious, qualified buyer, reducing the likelihood of a financing issue down the road.

If you are a veteran or military family considering your homeownership options, our team is here to help. We specialize in VA loans and understand the unique needs of our nation’s heroes. Don’t let the complexities of the real estate market deter you.

Get started with your homebuying journey today by understanding your financing options. For more information, please visit our pre-qualification forms at https://www.veteransloans.com/prequalify or call us at 1 (888) 232-1428. We’re committed to helping you make the most informed decision to achieve your dream of homeownership.