Signing a purchase agreement is a major step on the path to closing on a home. That’s why it’s important to know what this document includes and how it can impact your home-buying journey.
Key Takeaways:
- A real estate purchase agreement is a binding contract, outlining the terms of a home purchase for the buyer and seller.
- Key components of a home purchase agreement include contingencies, closing costs, financing terms, and buyer and seller obligations.
- Buyers and sellers should carefully review contract details, as backing out of the agreement after signing can result in penalties unless contract contingencies allow it.
What Is A Real Estate Purchase Agreement?
In real estate, a purchase agreement is a binding contract between a buyer and seller that outlines the details of a home sale transaction. The buyer will propose the conditions of the contract, including their offer price, which the seller will then agree to, reject or negotiate.
Negotiations may go back and forth between the buyer and the seller before both parties are satisfied. Once both buyer and seller approve the terms and have signed the purchase agreement, they’re considered to be “under contract.”
Other common terms for a purchase agreement include real estate sales contract, home purchase agreement, real estate purchase contract and house purchase agreement.
What’s Your Goal?
Buy A Home
Discover mortgage options that fit your unique financial needs.
Refinance
Refinance your mortgage to have more money for what matters.
Tap Into Equity
Use your home’s equity and unlock cash to achieve your goals.
Who Prepares The Home Purchase Agreement?
Typically, the buyer’s agent writes up the purchase agreement. However, unless they are legally licensed to practice law, real estate agents generally can’t create their own legal contracts. Instead, real estate agents will often use standardized form contracts that allow agents to fill in the blanks with the specifics of the sale.
What’s Included In A Real Estate Purchase Contract?
Every real estate transaction is different, so real estate purchase agreements can vary. However, there are some basic items that should be included in every purchase agreement.
1. Buyer And Seller Information
A home purchase agreement will include the full names of all of the buyers and sellers involved. In addition to legal names, the contract will also include contact information for all involved parties.
2. Property Details
The contract will include information about the property, including the physical address, the type of property, a brief description of the property and useful details, to ensure that everyone is on the same page.
The contract may also include details about personal property. For example, the contract may include information about which fixtures and appliances will be included in the sale.
3. Purchase Price
A home purchase agreement outlines the final purchase price of the house, including any transaction fees or deposits.
4. Mortgage Terms
Your real estate purchase agreement will include information about how the home will be paid for. If the buyer isn’t paying in cash, they’ll need some sort of financing (like a mortgage loan) to buy the home, the specifics of which will be written out in the contract.
For example, the contract will specify if the buyer is getting a mortgage to purchase the property or if they’re using an alternative, such as assuming the current mortgage on the property. Another option is seller financing, where the buyer makes payments to the seller rather than a traditional mortgage lender.
5. Property Taxes
The home purchase agreement will outline estimated property taxes, as well as what the buyer and seller are each responsible for paying. Tax responsibilities will generally be prorated based on the point during the year that the home sale happens, but specifics can vary by contract.
6. Contingencies
Contingencies are conditions that must be met before the sale can go through. There are many different types of contingencies that can be included in real estate contracts on both the buyer’s and the seller’s side. It’s important to understand any contingencies that are included in your purchase agreement.
Here are some of the more common contingencies you may see in home sale contracts:
- Financing contingency: A financing contingency means the sale is contingent on the buyer being able to obtain financing. This protects the buyer if they can’t qualify for a mortgage.
- Inspection contingency: An inspection contingency means the buyer can back out of the sale without penalty if they aren’t satisfied with a professional inspector’s assessment of the home.
- Appraisal contingency: An appraisal contingency states that the home must appraise at a value equal to or higher than the agreed-upon sale price. If the appraisal falls short, the buyer might struggle to find financing.
- Home sale contingency: With a home sale contingency, the home purchase is contingent on the buyer’s ability to sell their current home. If the buyer can’t sell their home within the agreed-upon time frame, then the purchase agreement is invalid.
- Title contingency: A title contingency means the buyer can leave the contract if the home isn’t clear of liens. Buyers often work with a title company to review the title report of a home to ensure no one other than the seller has a claim to the property.
7. Earnest Money Deposit
Earnest money, sometimes also referred to as a good-faith deposit, shows that a buyer is serious about buying the home. Sellers don’t want to waste their time; they want to know that a buyer is going to stick with the contract through closing. The earnest money deposit helps give them that confidence.
If, between the time of signing the purchase agreement and closing on the home, the buyer decides they want to back out for a reason that isn’t stipulated in the contract, they lose their earnest money and the seller gets to pocket it. However, a buyer can get their earnest money refunded if they back out due to a reason stipulated in the contract.
Earnest money is typically held in escrow by a third party and is credited toward the down payment or closing costs at closing if the deal goes through.
8. Closing Costs
At closing, there are certain fees and costs that will need to be paid. Closing costs can include things like the origination fee, appraisal and inspection fees, taxes, lenders fees and insurance. How much each party will pay depends on what was negotiated in the contract.
For buyers, closing costs average 3% – 6% of the purchase price. Closing costs may be slightly higher for sellers since they typically pay real estate agents’ commissions and may cover some of the buyer’s closing costs as part of the negotiation.
9. Closing Date
The closing date is the day that ownership of title officially transfers from the seller to the buyer. The home purchase agreement will outline when this transfer will happen, as well as when the buyer will get possession of the keys.
10. Disclosures
The seller is obligated to disclose certain things about the home, such as any water damage, property line disputes, mold, asbestos, zoning violations and whether or not the property is in a flood zone. Houses built before 1978 must also include a lead-based paint disclosure. Specific disclosure requirements vary by state.
11. Signatures
Finally, the agreement includes signatures from both the buyer and the seller. While you don’t technically need to get the purchase agreement notarized, it may offer some benefits. You should understand what the potential advantages and drawbacks of doing so are before moving forward. Shortly before the closing date, both parties will receive a final copy of the closing documents to review, which they’ll sign at closing to finalize the sale.
Ready To Become A Homeowner?
Get matched with a lender that can help you find the right mortgage.
What’s Not Included In A Purchase Agreement?
A purchase agreement is a relatively comprehensive document. But it doesn’t include everything about the transaction. This document likely won’t include the specific fees you might encounter along the way. For example, it likely won’t include information on the costs of a home appraisal or the specific breakdown of closing costs.
If you want to see what makes up your total closing costs, you’ll find these in the Closing Disclosure document provided by your lender.
What Happens After I Sign The Home Purchase Agreement?
When both you and the seller sign a home purchase agreement, the home is officially under contract. But that’s just one step in the march toward the closing table.
Once the contract is signed, it’s time to start working through the contingencies. As the buyer, this may mean scheduling a home inspection, securing financing and reviewing a home’s title report.
Meanwhile, the seller needs to take care of any agreed-upon repairs or improvements before the closing date.
If all the contingencies are met by closing day, the buyer and seller can complete the transaction. Typically, both parties will meet at the property for a walkthrough before going to a title company. There, you’ll review and sign documents, show proof of ID and homeowners insurance, and pay for any closing costs that haven’t been rolled into the cost of the loan.
Take The First Step To Buying A Home
Find a lender that will work with your unique financial situation.
House Purchase Agreement FAQ
Below are the answers to some commonly asked questions surrounding real estate purchase agreements.
Arriving at the final purchase agreement often involves some back-and-forth between the buyer and seller to make sure both parties are happy with the terms. If you’re negotiating a purchase agreement, have a solution-oriented mindset and a plan for different outcomes of the negotiation.
How do I negotiate a house purchase agreement?
If you aren’t satisfied with the terms outlined in the real estate purchase agreement, you can negotiate the contract with the help of your real estate agent. Often, the buyer’s agent writes up the purchase agreement based on a templated document created by an attorney. You can find home purchase agreement templates online, as well as templates for a real estate purchase counteroffer.
Arriving at the final purchase agreement often involves some back-and-forth between the buyer and seller to make sure both parties are happy with the terms. If you’re negotiating a purchase agreement, have a solution-oriented mindset and a plan for different outcomes of the negotiation.
The Bottom Line
Understanding what a purchase agreement is can help you navigate the home-buying process with ease. Although you’ll likely have a real estate professional to help you create and follow the details of this contract, read through the document on your own to make sure you understand all transaction details, such as property details, contingencies and closing costs.
Always read the fine print before signing on the dotted line, especially when it comes to a purchase as large as a house. Buying or selling a home is a big deal, and you can avoid headaches by making sure the deal you’re getting into is a good one.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
