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Buying a house requires multiple steps. There’s preapproval, making an offer, inspections, appraisals – and the list goes on. As you might imagine, one crucial part of the home buying process is the purchase agreement.
You can probably guess why it’s important from the name, but a purchase agreement is a legal document that includes detailed information about a property sale.
Here’s what you need to know about purchase agreements to help make your home buying (or selling) experience as smooth as possible.
What Is a Real Estate Purchase Agreement and Why Is It Important?
A real estate purchase agreement details the terms of a home sale, including what the seller is getting, what the buyer is getting and any next steps. Without a signed agreement in place, the home can’t be transferred to the new owner.
A signed purchase agreement is a legally binding contract. Once it’s signed, the house is considered “under contract,” and the seller can’t accept any other offers.
What’s in a Purchase Agreement for a House?
Every home purchase is unique, so every purchase agreement looks different. But you can expect to find the following in a typical purchase agreement:
- Buyer’s and seller’s personal information
- Purchase price of the home
- Financing information (if applicable)
- Property details
- Seller statements about the property’s condition
- Appliances, fixtures or furniture included in the sale
- Earnest money deposit information
- Closing costs
- Closing date (when ownership of the house gets transferred to you)
Let’s take a closer look at some of the key elements in a purchase agreement.
Contingencies are conditions added to a purchase agreement that allow the buyer or seller to back out of the deal. A contingency can describe an action that must be completed before the sale or a situation that might cause the sale to fall through.
The contingencies included in the purchase agreement are agreed to during the negotiation stage. If any of the contingencies aren’t met, the buyer or seller can back out of the sale scot-free.
Common contingencies include:
- Mortgage contingency: Also known as a financing contingency, this contingency lets buyers back out of the purchase if their mortgage loan isn’t approved.
- Home sale contingency: This contingency lets buyers back out if their current home doesn’t sell.
- Inspection contingency: This contingency lets buyers back out or asks sellers to pay for repairs to the home if the home inspection uncovers major problems with the house.
- Appraisal contingency: An appraisal contingency allows buyers to back out if the home gets appraised for less than the purchase amount.
Earnest money deposit
Often called “good faith money,” an earnest money deposit is a set amount of money used to show a seller you’re serious about buying their house.
The purchase agreement will state the exact amount of the deposit, when it’s due and who will hold it until closing (usually a neutral, third party keeps it in an escrow account).
An earnest money deposit is different from a down payment. But if the deal goes through, you can apply your earnest money deposit toward the down payment.
Closing costs are the expenses and fees you pay to close on the sale. The costs typically include loan processing fees, legal expenses and upfront homeowner costs that must be paid to transfer the property’s title (think: property taxes and home insurance).
The purchase agreement will not say how much you’ll pay in closing costs, but it will state whose responsibility it is to pay them. It could be the buyer, the seller or both.
You can use a mortgage calculator to help estimate closing costs on your purchase.
Who Creates the Purchase Agreement Document?
The buyer’s real estate agent creates the sales contract after the seller agrees to the buyer’s offer letter. Because they aren’t lawyers, agents fill in a purchase agreement template created by a real estate attorney.
It usually takes 1 – 2 days to prepare the agreement. After the buyer, seller and seller’s listing agent have reviewed and approved the agreement, the buyer and seller sign it.
Can You Cancel a Signed Purchase Agreement?
A seller or buyer can technically cancel a purchase agreement at any time. But canceling a signed contract without a contingency has serious consequences. The party that breaks the agreement could face legal consequences. And buyers beware, you could also lose your earnest money deposit.
To avoid losing money or ending up in front of a judge, make sure you’re happy with the terms and conditions of the purchase agreement before you sign it.
Purchase Agreement FAQs
No, a purchase agreement isn’t the same as an offer. A purchase offer can lead to a purchase agreement, but it doesn’t guarantee you’ll purchase the home.
You can negotiate what goes into your purchase agreement, but once it’s signed, you can’t negotiate anymore.
Yes, purchase agreements can expire. Pay close attention to your purchase agreement’s closing date. Miss it, and your contract is expired and possibly on the line.
Purchase Agreement Signed, Buyer Feeling Fine
A purchase agreement is one of the big final steps in the home buying process. Make sure you don’t have any questions or concerns about the wording, clauses or contingencies in the agreement before you sign on the dotted line.
Once you and the seller have signed off, guess what? You’re one step closer to the closing table and finally getting the keys to your new home.
Home is worth it.
The mortgage process can be exciting, and we’ll be with you all the way. Take the first step to owning a home. You’ll be glad you did.