What Does it Mean to Be ‘Under Contract’?
Ashley Altus, Certified Financial Counselor
Ashley Altus, Certified Financial Counselor
Ashley Altus is a writer and certified financial counselor through the National Association of Certified Credit Counselors.
Fact Checked by:
Dan is the Vice President of Marketplace Lending at Own Up. Throughout his career, he has held executive leadership positions in the mortgage and banking industry.
Updated: Oct 01, 2023
- What is Under Contract?
- How Do Contingencies Affect A Property That’s Under Contract?
- Four Common Contingencies
- How Do Earnest Money Deposits Play a Role in Contingencies?
- Should You Put An Offer In On A House That Is Under Contract?
- The Key Difference Between Under Contract Vs. Pending Sale
- The Bottom Line
During the home-buying process, you’ll encounter real estate listings in all different phases of the selling process. One of those is the “under contract” listing status.
What is Under Contract?
A listing for a home that is under contract simply means the seller and the buyer came into agreement as to the essential terms of the sale. You may also see homes for sale that are listed as “contingent.” This status also means the home is under contract, but the buyer or the seller can still back out of the contract if certain conditions (contingencies) are not met.
How Do Contingencies Affect A Property That’s Under Contract?
Even if the seller has accepted an offer and the home is under contract, there are still some additional hurdles that need to be conquered. In the real estate world, these are referred to as contingencies.
With a contingent offer, a buyer may have some additional criteria they want fulfilled before they officially close on (or purchase) the home. Think of a contingency as an escape clause, as it allows for a buyer or seller to back out of a deal if certain terms and conditions aren’t met.
Buyers are, in fact, allowed to [back out] of the contract if the conditions of the contingency clauses are not met, says Dino DiNenna, a broker and certified residential specialist in Hilton Head, South Carolina.
Four Common Contingencies
When a buyer makes an offer on a home, it may include certain contingencies that the seller has the option to accept or reject. Here are four types of contingencies that are common to see during the homebuying process.
1. Inspection Contingencies
It’s no surprise that a buyer may want to conduct a property inspection to make sure everything is as it seems with their potential new home. With an inspection contingency, a home inspection will inform the buyer and seller of any outstanding maintenance issues. Inspection contingencies are handled differently depending on your state and locality.
If the inspection report yields any issues, the prospective buyer can ask the seller to address them before they close on the deal. Depending on the inspection issues that arise, a seller may offer to pay all or a portion of a repair or replacement. Sometimes the seller may offer the buyer a credit – or a discount – on their purchase during the closing process. The seller could also opt to not address the issues and the potential buyer will have the option to walk away from the deal.
2. Appraisal Contingencies
During a home appraisal, a real estate appraiser reviews the condition of a home to assign it a fair market value. With an appraisal contingency, a buyer is checking to see if the home appraises for a minimum of the purchase price they’ve offered to pay.
Lenders use the appraised value of the home, not the purchase price, when it comes to making lending decisions. If the appraisal comes back lower than the sale price of the home, a buyer can either pay the difference in cash, negotiate with the seller, or walk away from the deal.
3. Mortgage Financing Contingencies
A home isn’t a small purchase. Because of that, most home buyers need to secure financing to afford a home. A mortgage contingency, sometimes called a financial contingency, ensures a buyer is not on the hook for a house if they’re unable to secure financing options for it. With this type of contingency, you won’t be forced into a home sale until a mortgage lender provides an approval letter that they will fund the loan.
If you have already been preapproved for the mortgage, you may consider waiving this contingency, as you have already secured financing for the loan. On the flipside, a cash buyer wouldn’t have a financing issue, so they wouldn’t make an offer with this type of contingency attached to it.
4. Home Sale Contingencies
If you already own a home, you may need the money from the sale of your current home to afford your new one. With a home sale contingency, a buyer’s house will need to sell within a certain time period in order for the sale to proceed. If they’re unable to furnish the sale of their current home, the buyer can back out.
How Do Earnest Money Deposits Play a Role in Contingencies?
Earnest money is the amount of money a potential buyer puts down before closing on a home. An earnest money deposit is not a requirement by law to buy a home, but sellers still expect to receive it as it can be a strong signal of your intent to purchase their home – in other words, it’s a good faith deposit.
“The purpose of earnest money is to provide the seller with some assurance regarding the buyer’s decision,” says DiNenna.
You’ll typically pay earnest money right after you go under contract and the buyer accepts your offer.
There isn’t a standard amount for earnest money. Earnest money deposit amounts will vary depending on your local real estate market. Depending on your state and locality, you’ll also find differences in when – or even how many times – the buyer pays earnest money.
If all the contingencies clear, the earnest money will go toward paying for closing costs or the house’s down payment. However, if a deal can’t be reached because of a contingency clause, the money will be returned to the buyer.
Should You Put An Offer In On A House That Is Under Contract?
So you’re looking for your dream home and you’ve found the perfect place! There is only one problem: The real estate listing says it’s under contract. So is it a lost cause, or is it worth your time to look at the property? Well, it depends.
Sometimes houses that are listed as contingent or under contract can come back on the market. According to the Realtors Confidence Index Survey for June 2023, it was reported that about 5% of contracts were terminated in the last three months and didn’t reach closing.
Buyers may back out of a being under contract for a whole host of different reasons.
“Buyers usually back out at the last minute when they notice legal issues or encumbrances on the property, home defects during inspection, or financial failures due to mortgage denial, or emergency causes,” DiNenna says.
Real estate agents may procure additional (or back-up) offers for the client, just in case the current buyer or the initial deal falls through. If your future home is already under contract with another buyer, you may want to consider making a backup offer.
Keep in mind: A backup offer is a binding contract. It is similar to putting an offer on a home. It comes with many of the same implications for buyers as a primary offer, so make sure to fully understand what this means for your financial situation.
Strategize your backup offer as you would any other home offer. A competitive offer could make a huge difference if you end up being next in line for the house. You never know what will happen, you may end up with the home!
The Key Difference Between Under Contract Vs. Pending Sale
A listing in the pending stage isn’t the same as a listing with a contingent status. If a home is showing up on a listing platform as pending, it could mean the buyer put forth an offer without contingencies, or the seller has dealt with the contingencies and the closing process is about to start. Either way, if a house is coming up as pending, it is considered a step ahead of a house marked as under contract, and the sale is likely to close.
The Bottom Line
If a home is under contract, a seller has accepted an offer, but the real estate transaction isn’t 100% complete yet. A contract with contingencies can serve as a safety net for buyers and sellers.