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  • Writer's pictureMike Roberts

What Happens When a Buyer Cancels a Sales Contract?

It’s awkward when you’ve signed a contract to buy a house and then discover that you can’t go through with it. Let’s look at the proper steps to cancel so it doesn’t become expensive, too.

Canceling during negotiations. If you have extended an offer to a seller by signing a contract, but the seller has not yet accepted and signed it, you are still in negotiation and can withdraw your offer with a letter in writing. If the seller has signed, and if you have paid earnest money, the next issue of timing comes into play. A contract signed by both parties and in which earnest money is paid by the buyer is a binding contract. To cancel without penalty, the buyer must meet certain conditions within a defined period of time.

Canceling during the due diligence period. Once you enter a home purchase contract, the next phase during which you can cancel with minimal cost is called the due diligence or contingency period. During this time, language in the contract should permit you to dissolve the deal under certain conditions which may include:

  • You applied for a mortgage and were not approved.

  • Your lender’s appraisal came back lower than the sales figure. The mortgage company lowers the amount it is willing to loan on the home. To move forward, you must cover the gap created by either putting more cash down, or by the seller being willing to come down on price. If neither of you are willing to do this, you can cancel.

  • A professional inspection revealed problems with the house’s condition for which you don’t want to pay and the seller is not willing to fix or to make price concessions.

Often an inspection or appraisal gone wrong can be negotiated to the satisfaction of both buyer and seller and the deal proceeds. If not, and you the buyer cancel, you may also lose the due diligence fee paid to secure the contract. Your earnest money in these situations should be refunded to you.

Canceling after due diligence. Without a clear clause in the contract allowing you to dissolve the deal after negotiations and due diligence have past, canceling will cost you your due diligence money and your earnest money. One exception might be if you have a clause that the sale is contingent on the selling and settlement of your existing home. A deadline date is usually set for this. If the deadline passes without a sale and settlement, the contract is dissolved and the earnest money is refunded to the buyer.

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