What Does It Mean When a House Is Under Contract

What Does It Mean When A House Is Under Contract? WHAT.EDU.VN offers a comprehensive understanding of real estate contracts. We clarify what it means for a house to be “under contract” and provide guidance on navigating the process. Learn about contingencies, potential pitfalls, and what to expect. Home buying agreement, real estate transaction, purchase agreement explained.

1. Understanding “Under Contract” in Real Estate

In the world of real estate, the phrase “under contract” signifies a pivotal moment in the home buying process. It means that a buyer and seller have reached a mutual agreement on the sale of a property, formalized through a signed written agreement. However, it’s crucial to understand that “under contract” doesn’t equate to a done deal. It’s more like the starting gun in a race, where various conditions and procedures need to be satisfied before the sale is finalized. This article will explain in detail what the term means, what it implies for both buyers and sellers, and what factors can influence the journey from “under contract” to “closed.”

1.1 The Meaning Behind the Phrase

“Under contract” in real estate indicates that a seller has accepted a buyer’s offer, and both parties have signed a legally binding agreement outlining the terms of the sale. This agreement, often called a purchase agreement or sales contract, specifies the property’s address, the agreed-upon price, the closing date, and any contingencies that must be met before the sale can proceed.

1.2 The Agreement: A Detailed Blueprint

The purchase agreement is a comprehensive document that outlines all aspects of the transaction. It includes:

• Identification of Parties: Names and contact information of both the buyer and the seller.
• Property Description: A detailed description of the property, including the address and any included fixtures or appliances.
• Purchase Price: The agreed-upon price for the property.
• Earnest Money Deposit: The amount of money the buyer deposits as a sign of good faith.
• Closing Date: The date when the ownership of the property will be transferred to the buyer.
• Contingencies: Conditions that must be met for the sale to proceed, such as a satisfactory home inspection, appraisal, or financing approval.
• Disclosures: Information about the property that the seller is legally required to disclose, such as known defects or environmental hazards.
• Other Terms: Any other agreed-upon terms, such as who pays for certain closing costs or repairs.

1.3 “Contingent”: A Word You’ll Often Hear

You might hear the term “contingent” used interchangeably with “under contract.” A contingent offer or sale means that the sale is dependent on certain conditions being met. These conditions, known as contingencies, are designed to protect the buyer (and sometimes the seller) and allow them to back out of the deal without penalty if certain issues arise.

2. The Significance for Buyers and Sellers

The “under contract” status has different implications for both buyers and sellers. Understanding these implications can help both parties navigate the process smoothly and avoid potential pitfalls.

2.1 For Buyers: A Time of Hope and Due Diligence

For buyers, being “under contract” is an exciting step closer to owning their dream home. However, it’s also a time for careful due diligence and fulfilling the obligations outlined in the purchase agreement.

• Hope: The buyer has secured the property, pending the successful completion of all contingencies.
• Due Diligence: This is the time for the buyer to conduct inspections, secure financing, and address any concerns about the property.

2.2 For Sellers: A Balancing Act of Optimism and Continued Vigilance

For sellers, being “under contract” is a sign that their efforts to sell the property have paid off. However, they must remain vigilant and prepared for the possibility that the sale might not go through.

• Optimism: The seller has found a buyer and is on track to sell their property.
• Vigilance: The seller needs to cooperate with the buyer’s inspections and appraisals, address any issues that arise, and be prepared to relist the property if the sale falls through.

3. Common Contingencies in Real Estate Contracts

Contingencies are clauses in the purchase agreement that allow the buyer (or sometimes the seller) to back out of the deal without penalty if certain conditions are not met. They provide a safety net for both parties and ensure that they are not obligated to proceed with the sale if significant issues arise.

3.1 The “Big Three”: Inspection, Appraisal, and Financing

The most common contingencies in real estate contracts are inspection, appraisal, and financing. These contingencies protect the buyer from purchasing a property with hidden defects, overpaying for the property, or being unable to secure the necessary financing.

3.1.1 Inspection Contingency

• Purpose: Allows the buyer to have the property professionally inspected to identify any potential problems or defects.
• Process: The buyer hires a qualified home inspector to conduct a thorough inspection of the property. The inspector will look for issues such as structural problems, roof damage, plumbing or electrical issues, pest infestations, and mold.
• Outcome: If the inspection reveals significant problems, the buyer can:
  • Request that the seller make repairs.
  • Negotiate a lower purchase price to compensate for the cost of repairs.
  • Cancel the contract and receive their earnest money deposit back.

3.1.2 Appraisal Contingency

• Purpose: Ensures that the property is appraised at or above the agreed-upon purchase price.
• Process: The buyer’s lender hires a licensed appraiser to determine the fair market value of the property. The appraiser will compare the property to similar properties that have recently sold in the area.
• Outcome: If the appraisal comes in lower than the purchase price, the buyer can:
  • Request that the seller lower the purchase price to match the appraised value.
  • Pay the difference between the appraised value and the purchase price.
  • Cancel the contract and receive their earnest money deposit back.

3.1.3 Financing Contingency

• Purpose: Protects the buyer in case they are unable to secure the necessary financing to purchase the property.
• Process: The buyer applies for a mortgage loan and provides the lender with the required documentation. The lender will review the buyer’s credit history, income, and assets to determine if they are eligible for a loan.
• Outcome: If the buyer is unable to obtain financing, they can cancel the contract and receive their earnest money deposit back. The financing contingency typically specifies a timeframe for the buyer to obtain loan approval.

3.2 Other Common Contingencies

Besides the “big three,” other contingencies can be included in a real estate contract to address specific concerns or circumstances.

3.2.1 Title Contingency

• Purpose: Ensures that the seller has a clear and marketable title to the property.
• Process: A title company conducts a title search to identify any liens, encumbrances, or other issues that could affect the buyer’s ownership of the property.
• Outcome: If the title search reveals problems, the seller must resolve them before the sale can proceed. If the seller is unable to clear the title, the buyer can cancel the contract.

3.2.2 Home Sale Contingency

• Purpose: Protects the buyer who needs to sell their current home before they can purchase the new property.
• Process: The contract is contingent on the buyer successfully selling their current home within a specified timeframe.
• Outcome: If the buyer is unable to sell their current home within the specified timeframe, they can cancel the contract and receive their earnest money deposit back. This contingency is less common in hot real estate markets where sellers have multiple offers.

3.2.3 Insurance Contingency

• Purpose: Allows the buyer to ensure that they can obtain adequate insurance coverage for the property.
• Process: The buyer applies for homeowners insurance and ensures that they can obtain a policy that meets their needs.
• Outcome: If the buyer is unable to obtain insurance coverage, they can cancel the contract. This contingency is more common in areas prone to natural disasters, such as floods or hurricanes.

4. Can You Still Make an Offer on a House That’s Under Contract?

Yes, you can still make an offer on a house that’s under contract. This is known as submitting a “backup offer.” While the seller has already accepted an offer, there’s always a chance that the first deal will fall through due to unmet contingencies or other issues.

4.1 The Backup Offer: A Second Chance

A backup offer puts you in line to purchase the property if the first offer falls through. It’s a way to express your interest in the property and potentially snag it if the original deal doesn’t work out.

4.2 How Backup Offers Work

• Submission: You submit your offer to the seller, just as you would for any other property.
• Consideration: The seller reviews your offer and decides whether to accept it as a backup offer.
• Contingency: The backup offer is contingent on the first offer falling through.
• Activation: If the first offer is terminated, your backup offer automatically becomes the primary offer, and you move forward with the purchase process.

4.3 Is It Worth Making a Backup Offer?

Whether or not to make a backup offer depends on your individual circumstances and how much you want the property.

• Pros:
  • You have a chance to purchase a property you really want, even if it’s already under contract.
  • You might be in a better negotiating position if the first deal falls through, as the seller may be eager to close a deal quickly.
• Cons:
  • Your earnest money deposit will be tied up while you wait to see if the first deal falls through.
  • You might miss out on other properties while you’re waiting.

5. “Active Under Contract”: A Subtle but Important Distinction

The phrase “active under contract” has a specific meaning in real estate. It indicates that the seller has accepted an offer but is still actively seeking backup offers.

5.1 Accepting Backup Offers: A Strategic Move

When a property is listed as “active under contract,” it means the seller is open to receiving additional offers in case the current deal falls through. This could be due to concerns about the buyer’s financing, the inspection results, or other potential issues.

5.2 What Does It Mean for Potential Buyers?

If you see a property listed as “active under contract,” it means you still have a chance to make an offer. The seller is signaling that they are not completely confident in the current deal and are willing to consider other options.

6. Pending vs. Under Contract: Knowing the Difference

It’s important to distinguish between the terms “under contract” and “pending” in real estate. While both indicate that a property is in the process of being sold, they represent different stages of the transaction.

6.1 Under Contract: The Beginning of the Process

As we’ve established, “under contract” means that the buyer and seller have signed a purchase agreement, but the sale is still subject to contingencies.

6.2 Pending: Nearing the Finish Line

“Pending” means that all contingencies have been met, and the sale is in the final stages of closing. The buyer has secured financing, the inspection has been completed, and the appraisal has come in at or above the purchase price.

6.3 What Does “Pending” Mean for Potential Buyers?

When a property is listed as “pending,” it’s highly unlikely that you’ll be able to submit an offer. The sale is expected to close, and the property will soon be off the market.

7. How Often Do Real Estate Contracts Fall Through?

While the vast majority of real estate contracts close successfully, it’s important to be aware that deals can and do fall through. According to the National Association of Realtors, about 5% of home sales fell through in the fourth quarter of 2024.

7.1 Common Reasons for Deals Falling Through

• Financing Issues: The buyer is unable to secure the necessary financing.
• Inspection Problems: The inspection reveals significant problems that the seller is unwilling to fix.
• Appraisal Issues: The appraisal comes in lower than the purchase price, and the buyer and seller cannot agree on a new price.
• Title Issues: The title search reveals problems that cannot be resolved.
• Buyer’s Remorse: The buyer simply changes their mind and decides not to proceed with the purchase.

7.2 Minimizing the Risk of a Deal Falling Through

• For Buyers:
  • Get pre-approved for a mortgage before making an offer.
  • Hire a qualified home inspector to conduct a thorough inspection.
  • Review the title report carefully.
  • Communicate openly with your real estate agent and lender.
• For Sellers:
  • Be upfront about any known issues with the property.
  • Respond promptly to the buyer’s requests for information.
  • Consider offering a home warranty to protect the buyer from unexpected repairs.

8. What to Avoid Doing When Your House is Under Contract

Once your house is under contract, it’s important to avoid making any major changes to your financial situation or the property itself. These changes could jeopardize the sale and potentially lead to legal issues.

8.1 For Buyers: Maintaining Financial Stability

• Avoid Large Purchases: Don’t make any large purchases, such as a new car or furniture, that could affect your credit score or debt-to-income ratio.
• Don’t Open New Credit Accounts: Avoid opening new credit cards or taking out new loans.
• Keep Your Job: Don’t change jobs or quit your current job without consulting your lender.
• Communicate with Your Lender: Keep your lender informed of any changes to your financial situation.

8.2 For Sellers: Maintaining the Property

• Don’t Make Major Renovations: Avoid making any major renovations or alterations to the property without the buyer’s consent.
• Maintain the Property: Continue to maintain the property in good condition, as required by the purchase agreement.
• Disclose Any New Issues: If any new issues arise with the property, disclose them to the buyer immediately.

9. Can a Buyer Back Out of a Real Estate Contract?

Yes, a buyer can back out of a real estate contract under certain circumstances. The purchase agreement typically outlines the conditions under which the buyer can terminate the contract without penalty.

9.1 Contingency Clauses: The Buyer’s Escape Route

As mentioned earlier, contingency clauses provide the buyer with a legal way to cancel the contract if certain conditions are not met.

9.2 Other Reasons for Cancellation

• Attorney Review Clause: In some states, buyers have a right to have the contract reviewed by an attorney, who may advise them to cancel the contract.
• Title Issues: If the title search reveals problems that cannot be resolved, the buyer can cancel the contract.
• Breach of Contract by Seller: If the seller breaches the contract, the buyer can cancel the contract and potentially sue for damages.

10. What Happens If You Breach a Real Estate Contract?

Breaching a real estate contract can have serious legal and financial consequences for both buyers and sellers.

10.1 Potential Consequences

• Lawsuit for Damages: The non-breaching party can sue the breaching party for damages, such as lost profits, expenses incurred, and attorney’s fees.
• Specific Performance: The non-breaching party can sue to force the breaching party to perform their obligations under the contract.
• Loss of Earnest Money Deposit: The buyer may lose their earnest money deposit if they breach the contract.

10.2 Avoiding a Breach of Contract

• Understand the Contract: Read the purchase agreement carefully and make sure you understand all of the terms and conditions.
• Meet Deadlines: Meet all deadlines specified in the contract.
• Communicate Openly: Communicate openly with the other party and address any concerns promptly.
• Seek Legal Advice: If you are unsure about your rights or obligations under the contract, seek legal advice from a qualified real estate attorney.

11. Navigating the “Under Contract” Phase with Confidence

The “under contract” phase of a real estate transaction can be both exciting and stressful. By understanding the process, common contingencies, and potential pitfalls, both buyers and sellers can navigate this phase with confidence and increase their chances of a successful closing. Remember to work closely with your real estate agent, lender, and other professionals to ensure a smooth and stress-free transaction.

Navigating the complexities of real estate contracts can be daunting. WHAT.EDU.VN is here to simplify the process and provide you with the knowledge you need to make informed decisions. Do you have questions about a specific clause in your contract? Are you unsure about your rights and obligations as a buyer or seller? Don’t hesitate to reach out to us at WHAT.EDU.VN for free answers to your questions. Our team of experts is ready to provide you with clear, concise, and reliable information. Contact us today at 888 Question City Plaza, Seattle, WA 98101, United States or Whatsapp: +1 (206) 555-7890. Let WHAT.EDU.VN be your trusted resource for all your real estate questions.

FAQ Section

Question	Answer
What does it mean when a house is “under contract?”	It means that a buyer and seller have agreed on the terms of a sale and have signed a purchase agreement. However, the sale is still subject to certain conditions (contingencies) being met.
Can I still make an offer on a house that’s under contract?	Yes, you can submit a backup offer. If the first deal falls through, your offer will be considered.
What is a contingency?	A contingency is a condition that must be met for the sale to proceed. Common contingencies include inspection, appraisal, and financing.
What is an inspection contingency?	It allows the buyer to have the property professionally inspected. If significant problems are found, the buyer can request repairs, negotiate a lower price, or cancel the contract.
What is an appraisal contingency?	It ensures that the property is appraised at or above the purchase price. If the appraisal is lower, the buyer can renegotiate the price or cancel the contract.
What is a financing contingency?	It protects the buyer if they are unable to secure financing. If the buyer is denied a mortgage, they can cancel the contract.
How often do real estate contracts fall through?	About 5% of home sales fell through in the fourth quarter of 2024, according to the National Association of Realtors.
Can a buyer back out of a real estate contract?	Yes, under certain circumstances, such as unmet contingencies or breach of contract by the seller.
What happens if I breach a real estate contract?	You could be sued for damages, forced to perform your obligations under the contract, or lose your earnest money deposit.
What should I avoid doing when my house is under contract?	Buyers should avoid making large purchases or opening new credit accounts. Sellers should avoid making major renovations or failing to maintain the property.

By understanding these key aspects of the “under contract” phase, you can navigate the real estate process with greater confidence and achieve your goals, whether you’re buying or selling a home. Remember, what.edu.vn is here to support you every step of the way.