Buying a home is one of the biggest financial investments most of people will ever make. With that kind of commitment, it's no wonder people get cold feet. Even sellers have been known to get antsy. Backing out of a home loan doesn't just affect the mortgage company, though: other parties also have a lot riding on your decision. If you change your mind at the eleventh hour, you might lose earnest money and incur real estate agent commission fees.
TL;DR (Too Long; Didn't Read)
If you've signed a contract to purchase a home, it's legally binding. But you may be able to back out of the mortgage before closing on the deal when you're within a three-day window (if allowed by the terms of your specific loan) or when contract contingencies have not been met within their specific time frames.
Reasons for Backing out of Loan
Other than just getting cold feet about the deal, unforeseen circumstances can happen between signing the contract and closing on your house. You may unexpectedly lose your job or have medical issues. And in a 2017 National Association of Realtors' (NAR) survey, the main culprits were financing problems and home inspection/environmental issues.
Right of Rescission
Certain types of home loans come with a sort of built-in buyer's remorse safety net. The Truth in Lending Act is a federal law that gives buyers a right of rescission for some loans. If you're refinancing your house with a different lender or using it as collateral for a home equity loan, you can change your mind up to three days after you close the deal.
The right of rescission is not available if you're refinancing with the same bank or getting a mortgage for a new purchase. If you exercise the rescission right, you must notify your lender in writing.
Buyers' Contingencies Not Met
If you're a buyer poised on the edge of closing, there are some legitimate reasons for turning your back on a home purchase. Most contracts include a number of contingencies that protect buyers in case something goes wrong. Unless you're fresh off a lottery win, your loan probably covers nearly the entire purchase price.
If the appraisal comes back lower than the loan amount and the seller can't make up the difference, you have no obligation to go forward. You're also protected if a home inspection turns up defects or you discover the seller falsified information.
Sellers' Contingencies Not Met
In most cases, it's harder for sellers to back out. By the time you're ready to close, you've already signed a purchase agreement with the buyer, which means you're bound by a legal contract.
If your agreement is contingent on your finding a new place to live or requires the buyer to meet certain obligations, you might be able to cancel the contract. You will probably have to refund any earnest money and -- depending on the listing agreement -- pay your agent some or all of her commission. If the buyer files suit, the court can't force you to sell, but it can stop you from selling to anyone else.
Short Sale Option
The short sale is a different breed from regular home purchases. Several buyers might be interested in the same house, which can result in multiple offers. To secure a deal, some buyers put down a large deposit.
If the seller's mortgage company rejects your offer, you will get your deposit back. Try to back out after the bank approves the sale, though, and you could find yourself in a quandary. Unless you can find a discrepancy in the square footage or the lender decides to foreclose, you might have to forfeit your deposit.
A.M. Hill has been a licensed attorney since 2004. Her practice areas include family law and divorce, probate and estate planning and bankruptcy. Hill holds a Juris Doctor from the Cleveland-Marshall College of Law.