With all the exciting steps involved in buying a home, questions often come up about the purchase contract itself. The purchase contract is so important in the process, yet it might contain terms that seem like another language – until you understand how all the parts work together perfectly.
Today we’re walking you through 7 things you’ll need to know about your purchase contract – and what’s most likely to happen in the unlikely event you decide not to proceed with buying the home, after all.
The Earnest Money Deposit
Earnest money deposit is the cash you’ll need to come up with immediately. It’s a way to commit to the sale and demonstrate to the sellers that you’re seriously interested in this home. The exact amount of your earnest money will typically run between 1% and 2% of the purchase price.
When your offer is accepted, this money is held in an escrow account by the seller’s broker or a title company and is a credit towards the final negotiated purchase price. (Never give your earnest money directly to the seller.)
Purchase Contract Contingencies
A contingency means there’s something the buyer has to make happen before the process can proceed, like selling the home they already own. Contingencies in the purchase contract let you back out of the sale if something goes wrong without losing your earnest money.
Every contingency will come with a deadline that must be met to keep things moving. Here are three common contingencies included in the purchase contract.
1. Loan Commitment Deadline
This is the date by which your home loan must be approved by the lender and the commitment letter is issued.
Complications sometimes arise when a loan commitment isn’t “clean,” meaning there are still outstanding issues to be cleared up or documents to be presented to the sellers. If these problems arise after the mortgage commitment date, the buyer’s deposits may be lost.
2. Appraisal Objection Deadline
On or before the appraisal objection deadline, the buyer must give the seller notice if the appraisal has come in under the purchase price of the home. If this happens, the parties have a couple options; the seller can come down in price to match the appraised value, the buyer can bring the difference in cash to closing or they can terminate the contract.
3. Inspection Objection Deadline
Typically, home inspection contingencies are part of the purchase contract. This is to protect the buyer in the event that a defect is found during in the inspection. Based on the results of a home inspection, the homebuyer can try to negotiate any necessary repairs or ask for a reduced purchase price to compensate for the cost of the repairs.
If the inspection uncovers significant defects, you may consider cancelling the sale. Any of these items require action on behalf of the buyer prior to the inspection objection deadline.
Settlement or Closing Date
The buyers and sellers usually negotiate a closing (settlement) date, for all involved parties meet to make the sale of the home official. It’s best to choose a date that gives you plenty of time to take care of your loan approval, home inspection, appraisal, and any other contingencies.
New Home Possession Date
New homeowners typically take possession of their new property on the date of closing. Although that doesn’t mean this is always the case. Keep in mind that the possession date is negotiable, and can affect the strength of your offer.
If the seller needs extra time to find a new place to live, offering a possession date that’s further out could make your bid more attractive. On the other hand, sellers sometimes allow buyers to move in before settlement if the house is already empty.
What If You Want Out Of The Purchase Contract?
Before you sign any legal documents ask how you can cancel if things don’t work out the way you hope or if you change your mind. Read through the contract and ask your agent to point out to you the cancellation clauses. There are a number of contingencies that allow you to back of the purchase contract without losing your earnest money.
If your reasons for halting the sale fall outside those contingencies, however, the sellers will usually get to keep the earnest money and could be awarded damages from profits they lost after ultimately selling the property at a lower price.
Knowledge Is Power!
The homebuying process is often full of exciting milestones as well as disappointing bumps in the road. Being familiar with your purchase contract and the process itself will help you in making the best decisions. Happy house hunting!