What Does It Mean When A House Is Under Contract?

If you’re looking to buy a house, you’ve probably scrolled through home listings and seen the term “under contract.” Many buyers don’t want to deal with any hiccups early in the home buying-process so they ignore “under contract” listings because they assume these listings are unavailable. But “under contract” doesn’t necessarily mean “unavailable.”

So, what does it mean when a house is under contract? Let’s dive into the deal and see why considering a listing under contract could be a home search home run.

The Definition Of A House Under Contract

“Under contract” means the home seller has accepted an offer from a potential buyer but all contingencies have not been removed. Real estate contracts often include contingencies that must be considered before the sale of the home can be finalized. Common contingencies you may encounter include:

• Financing: Buyers are required to obtain financing to purchase the property within so many days of their offer being accepted. Lenders will provide a prequalification letter to give the buyer and their agent an idea of what they can afford. Once an offer is accepted, the buyer will still need to obtain full approval for a mortgage.
• Appraisal: Because lenders typically won’t provide a loan for more than the value of the property, they most often require a home appraisal. In a competitive market, many buyers offer more than the asking price to have a better shot at getting their offer accepted. If the home doesn’t appraise for the amount the buyers offered, they will be responsible for covering the difference unless the seller is willing to lower their price to match the appraised value. This is often where a deal falls Buyers have already saved for a down payment, so coming up with more money at the closing table can be a challenge.
• Purchase contingent on sale of buyer’s home: If a home buyer has a home with a mortgage, they may make their offer contingent on the sale of their current home. If the home buyer doesn’t sell their home in the allotted time, they may not qualify for financing for the new home.
• Home inspection/condition: Home inspections are an important part of the home-buying process, and several types of home inspections could cause a deal to fall apart. If an inspector finds something like a leaking water heater or long-term leak causing mold and mildew, the buyers can cancel the contract, ask for repairs or request a lower price to accommodate the repair costs.

How Long Can A House Be Under Contract?

Most residential home sales take 4 – 8 weeks from start to finish, although some transactions take longer depending on unique circumstances surrounding the deal. Although canceled contracts don’t happen all the time, they do happen. While a house is under contract, sellers can consider other offers as backup options if something goes awry with the original offer.

Under Contract Vs. Pending: Is There A Difference?

“Under contract” and “pending” have different meanings, but some markets use these terms interchangeably. Be sure in any real estate transaction to understand the language and what the status could mean to you and your offer. Ask your real estate agent or broker to break down the definitions in your area.

Listings that are “under contract” require that a few steps be completed before they’re considered pending. In most cases, a “pending” status on a home listing means the seller has accepted an offer and all contingencies have been removed. Some markets have a “pending – accepting backup offers” status option, which means the sale is pending but the seller and the agent will accept offers for consideration if the expected buyer can’t complete the sale.

Can My Deal Fall Through?

Deals fall apart for a variety of reasons. A house under contract means that the sellers have accepted the offer but, as noted already, certain contingencies and circumstances can turn a home sale upside down. Up next are three issues that might cause a deal to fall through.

A Low Appraisal

When homeowners list their home for sale, they can do so at any price they choose. However, as mentioned earlier, lenders won’t loan borrowers more than the home appraisal value.

For example, Sam listed their home for $200,000 and accepted an offer at their asking price. The appraisal report determined the home is worth $195,000. Sam’s buyer would need to contribute an additional $5,000 to purchase the home or ask Sam to lower the price.

If you’re actively seeking a new home, one way you can sweeten your offer is by providing an appraisal guarantee. This ensures you will pay the difference out of your own pocket if the appraisal comes in for less than the accepted offer.

Reach out to your real estate agent to discuss your budget and whether this is a tactic you can use to make your offer more likely to be accepted.

Inspection Problems

Home inspections are vital in the home buying process. Often, buyers initially have a short amount of time to tour the home. Because of this, both buyers and sellers agree to an inspection period once an offer is accepted. A buyer can waive an inspection, but we don’t recommend this. A buyer should inspect the home alongside a licensed professional to learn more about the health and function of the structure as well as systems of the home.

Home inspectors will look at the home’s systems and note any irregularities, deficiencies and potential hazards. If the buyers find something unsatisfactory during this inspection, they may ask the sellers to make the repairs. In a competitive seller’s market, the seller may refuse to make any repairs and reject the buyer’s counteroffer. The seller could have a backup offer they’re considering in a seller’s market, so make sure any repairs you’re asking for are absolute deal breakers.

The Buyer’s DTI Ratio

Lenders rely on a few key factors to determine the amount they’re willing to loan and the rate at which they’re willing to loan it. A home buyer’s debt-to-income ratio plays a large part in how much a lender can provide.

Your debt-to-income ratio fluctuates when you borrow money and pay off debt. When a borrower initially speaks with a lender, the lender checks their DTI, credit score and other factors to provide a budget for purchasing a home. Lenders keep an eye on rates throughout the purchase process and do likewise with the borrower’s financial status to ensure they’re on track to get the best interest rate possible.

If you’re looking for a home, it’s best not to make any major financial decisions or purchases until you’ve talked with your lender. DTI is a unique balance of debt and income. A slight shift in your DTI could cause your loan interest rate to rise, or worse, you could no longer qualify for a home loan.

Should I Consider A Backup Offer?

Home buying in a seller’s market can be tough and not for the faint of heart. Spending your free time searching for homes and scheduling tours, only for your offer to be rejected, gets old fast.

Backup offers are great if you have flexibility in your purchase timeline and can wait to see how the sale shakes out. Backup offers have a slim chance of being chosen, because the seller’s agent has likely done their homework and picked a well-qualified buyer. But as mentioned earlier, a home under contract still has several contingencies that need to be worked through before it reaches “pending” status.

If you fall in love with a house and it has everything you and your family need, why not cover all your bases and ask that your offer be considered as backup? After all, you want to be the first phone call the seller’s agent makes if the deal falls through.

The Bottom Line

If you’re searching for your next home and haven’t given any thought to an “under contract” listing, it might be time to consider one or more. Homes that are under contract haven’t worked through contingencies like financing, appraisal and inspection. There’s still room for just about anything to happen.

If you’re ready to search for your next home with fresh eyes and more options, check out the Homes For Sale page at Rocket Homes^SM.