What Does Under Contract Mean?

When looking at homes online, it's tempting to scroll past online listings that state "under contract" because you may assume it means "off the market."

Not so fast. "Under contract" doesn't necessarily mean "unavailable."

What does under contract mean, exactly? Read on to find out.

What Does Under Contract Mean In Real Estate?

In real estate, “under contract” means that a seller has accepted an offer from a buyer, but all contingencies on the property must be met for the home to be considered sold – so there’s still a chance the deal could fall through. A contingency refers to clauses that buyers include when purchasing a home that allow them to back out of the sale if certain conditions are unmet.

Under Contract Vs. Pending

It's easy to get confused by "under contract” and “pending” in real estate, because in both cases, a homeowner has accepted a buyer's offer.

"Pending" means that most contingencies have already been addressed and a contract signed – only closing and escrow remain. At this point, the sale of the property is almost final but the property hasn't yet traded hands. You may be able to put in a backup offer, which another home buyer makes while acknowledging the existing offer. It ensures a contract with the seller if the first offer falls through. However, unless the original offer falls through, a pending sale may be closer to a done deal with an original buyer.

Deals on properties under contract fall through more often than you might expect (and more often than pending) because they must hurdle over contingencies to complete the sales. In that case, you may be able to scoop up homes under contract more easily than those that are pending.

Can A Sale Fall Through Once It’s Under Contract?

A deal involving a house under contract could still fall through for several reasons, particularly if one of the contingencies listed in the contract isn’t met. It's common for sales to fall through due to various circumstances, including financing not approved, contingencies not being met and the buyer even getting cold feet.

Can A Buyer Back Out Once A House Is Under Contract?

A buyer can back out of a sale without consequence once it’s under contract, if listed contingencies aren’t met. However, if you back out of a sale under contract outside of any contingencies, you may face consequences.

You may lose your earnest money deposit if you walk away. This deposit is usually between 1% – 3% of the purchase price, meaning that, on a $300,000 home, you could lose between $3,000 – $9,000.

Contingencies That Can Impact A House Under Contract

Several contingencies can impact a house under contract. Learn how often contingent offers fall through and familiarize yourself with the following types of contingencies – home inspection, home appraisal, financing and home sale contingencies.

Home Inspection Contingency

A home inspection occurs when a licensed inspector checks the home's system health and function, checking for irregularities and hazards. For example, a certified home inspector will look at the foundation, roof, attic, appliances and HVAC, plumbing and electrical systems. Due to this, an inspection typically lasts 2 – 4 hours. Inspectors recommend repairs and upgrades based on their findings.

A home inspection contingency, also called an inspection contingency, requires a home to be inspected during a specific period and a home buyer can negotiate repairs or cancel the contract once the home inspection is complete. Contingency clauses often give sellers a certain number of days to make repairs.

Home Appraisal Contingency

A home appraisal contingency, also called an appraisal contingency, can also cause a sale to fall through.

Your lender will order a licensed appraiser to appraise the home. The appraiser looks at your home and several recently sold homes in the area as comparables to offer a professional opinion about how much the home is worth. Lenders ask for appraisals because they only want to finance a home that sells for what it's worth.

If you offered more than what the appraisal says the home is worth, you can back out of the sale through the appraisal contingency. Of course, you can also ask the seller to lower the sale price or you can come up with the cash to cover the difference between your offer and the appraisal.

Financing Contingency

A financing contingency can also cause a sale to fall through. In other words, if buyers cannot get the financing they need to get a mortgage from a lender, they can lean on the financing contingency to back away from the sale.

Home buyers must meet their lender's requirements to qualify for the home loan, and if the lender finds something that disqualifies the buyer, such as a high debt-to-income (DTI) ratio, then the lender may deny the loan and the sale could fall through. DTI tells lenders the amount you spend on monthly debt payments versus the amount of money you make each month. Lenders typically like to see a DTI of 43% or less.

Home Sale Contingency

A home sale contingency means a sale will only go through if a buyer sells their current home first. This way, a buyer doesn't get stuck paying for two mortgages. However, a buyer doesn't always find a way to sell their home first.

Sellers sometimes reject this contingency in a seller's market, knowing that other buyers may not have this contingency.

Should A Seller Consider Backup Offers On A House That’s Under Contract?

Backup offers on a house that’s under contract means another buyer makes a backup offer to a seller, acknowledging the existing offer. This puts that buyer in line to purchase the home should the first buyer back out. In return for the seller's promise that the backup offer is next in line, the buyer makes an earnest money deposit into an escrow account.

Backup offers work well for those who have a flexible purchase timeline. Backup offers have a slim chance of going through, but as long as buyers understand that, making a backup offer could be a great option.

If you fall in love with a particular home, why not consider throwing your hat in the ring by making a backup offer? If the original deal falls through, you want the seller's real estate agent or REALTOR® to call you first!

The Bottom Line

What does it mean if a house is under contract?

"Under contract” means that a seller has accepted a buyer’s offer on a property. To close on the sale, contingencies must be met or the deal could fall through. You may want to consider making a backup offer if you're a prospective buyer, especially if you don't have to move in a hurry.

Ready to begin the home buying process? Start your mortgage application online today.