How to terminate home purchase agreements and contracts

When comparing your home financing options, it may be easy to feel overwhelmed by the amount of information you can encounter. There are times when that feeling may cause confusion, and you might wind up signing contracts or agreements where you weren’t 100% clear on the details. If this happens, remember that you have the right to terminate various agreements and relationships as you move through the homebuying process. The rules that apply to your situation may vary depending on your state’s laws and regulations.

Certain agreements will come with cancellation fees and penalties, but these charges may be insignificant in comparison to the cost or emotional anguish of getting stuck with a home you don’t want. Your partners throughout the home buying process should always let you know before you reach a point of no return.

Let’s look at a few of the most common relationships you’ll enter and your options for taking a step back.

Ending a buyer’s agent agreement

Sometimes people just don’t work well together. If you find yourself in this situation with your real estate agent or team, you may want to cut ties before you purchase a home.

Your buyer’s agreement is usually binding for a set period. However, most of these agreements contain language that will allow you to terminate with a letter of cancellation.

Your search and payment agreement should include options for either you or the realtor to terminate. Read through your agreement and call your brokerage/agency. You’ll likely have the option to either switch agents or cancel the agreement altogether. 

Your ability to cancel may depend on the type of agreement you enter, although you should always review your specific agreement:

• Non-exclusive, not-for-compensation. The agreement can be dropped by you or the broker at any point in the home search.
• Non-exclusive, right-to-represent. These agreements can be revoked under specific terms such as when you find a home through another agency or by filing specific paperwork.
• Exclusive right-to-represent. Typically, these agreements can only be ended if and when the contract is breached. Exclusive contracts are usually time limited, so it may be best to wait out the period instead of attempting to cancel.

Terminating your mortgage application or agreement

Understanding the components of a mortgage agreement, application, and the process for termination can help you navigate the complex world of home financing.

By staying informed and communicating openly with your lender, you can try to arrive at a solution that works for your unique situation. It’s also important to do further research to become familiar with what state laws and regulations allow for in the area where you live.

Canceling a mortgage application

If you need to cancel a pending mortgage application, call your loan officer or broker immediately. You may have a three-day window to cancel the application and recover any paid fees.

Tell the lender you want to cancel the pending application and provide a reason. Explaining the situation will help the lender understand any future needs.

Next, go through your application with your lender. Typically, you may get refunds of certain fees, such as credit check and appraisal fees. Other fees, such as application processing and rate lock-in fees, are usually non-refundable. You may have to pay a penalty for cancelling a mortgage application.

It is likely that your lender will be required to provide confirmation of cancellation over the phone or in person and will also mail a confirmation. Keep all cancellation documents just in case you need it in the future.

Canceling a mortgage loan agreement

A mortgage loan agreement is a legally binding document that outlines terms and conditions of a mortgage loan between a borrower and a lender. This agreement is a crucial part of the home financing process as it establishes the rights and responsibilities of both parties involved.

There may be various reasons why a borrower might want to terminate their mortgage agreement, including:

• Finding a better loan offer with more favorable terms.
• A changing financial situation that makes it difficult to meet the monthly payment obligations.
• The decision not to purchase the property for personal reasons.

If you need to terminate a mortgage agreement and state laws allow for you do so, you should follow these steps:

• Review the agreement. Carefully read the terms and conditions of the agreement to determine if there are any provisions related to termination or cancellation. Some agreements may include a period that allows a borrower to cancel within a specified time without penalty.
• Contact the lender. Communicate your intention to terminate the agreement with your lender as soon as possible. Be sure to do this in writing, either via email or a formal letter to maintain a record of correspondence related to the termination.
• Negotiate with the lender. Depending on the reason for termination and the terms of the agreement, the lender may be willing to negotiate a mutually agreeable resolution. This could include waiving certain fees, adjusting the interest rate, or modifying the loan term.
• Pay any applicable fees. If the agreement includes penalties or fees associated with termination, be prepared to pay for these. Discuss with your lender whether the fees may be waived or not, depending on your situation.
• Obtain a release. Once the termination has been agreed upon and any fees have been paid, request a written release from the lender. This document will confirm that the mortgage agreement has been officially terminated and that you are no longer obligated to the terms of the loan.

Walking away from a real estate purchase agreement

Buyers may get excited about the prospect of purchasing a home and put in an offer on the first house they like. However, once they’ve had more time to reflect, they may decide it isn’t the right house for them after all.

At that point, the next step is terminating their contract. Here are some guidelines and possible repercussions from walking away from the purchase of a home after you’ve signed a home purchase contract.

Keep in mind that anytime you deal with a legal document, you may want to contact an attorney to determine your rights under the contract and help you understand what state laws and regulations may apply to your situation.

Contingencies

Most contracts contain several contingencies that allow you to walk away from the contract under certain conditions. Designed to limit the consequences for both parties, these contingencies are included at the start of the contract and agreed upon by both the buyer and seller. The most common contingencies are for:

• Financing. Even if you have been pre-approved, it is not guaranteed that you will gain final approval for the purchase price of the house. The underwriter may not approve the loan, or something could change with your credit or employment situation. If a financing contingency is included in the contract, you can usually walk away with your deposit. However, the contingency expires before closing, so make sure financing is in place with no issues before that date.
• Appraisal. If an appraisal comes in low, it can affect the amount of the approved loan. If the appraisal is less than the purchase price, the seller can reduce the price, or you can pay the difference. It may also be possible for you to walk away from the deal, but you should ask your real estate agent to explain your options. This contingency may also apply for a limited time only.
• Home Inspection. If a home inspection reveals problems, generally depending on your specific contract, you may either require the seller to make the repairs or you can walk away from the deal. Typically, you have only a few days to decide after an inspection is completed in this contingency, so it’s important to act quickly.
• Sale of Existing Home. If you are a current homeowner trying to sell a house and buy another, you can add in a contingency for the sale of your current home. This allows you to put your new home under contract while trying to sell your current home. However, if you fail to sell your home, you may be able to get out of the purchase contract up to a certain point. This must be included in the contract and the two parties must agree. A seller will often look more favorably on a non-contingent purchase offer than on one that is contingent on the sale of another property simply because it reduces the seller’s risk. There may also be penalties, such as losing the initial deposit you provide with the contract.

After the contingencies

Once the time limit has expired on the contingencies, you may still be able to walk away from the house right up until closing, although you may lose your deposit. This is called liquidated damages. The seller could potentially sue you for specific performance, which means that you would be required to complete the contract.

Terminating a contract for the purchase of a home is a serious decision that should not be made lightly. Although walking away may be possible, it’s far better to use due diligence to understand the home-buying process, research your desired property, and think objectively about your wants and needs before you sign a contract so you can avoid “buyer’s remorse.” After all, your goal is to buy a new house to live in — not to walk away from.