What Does Under Contract Mean? Everything You Need To Know

If you’re looking for a new home, you know that finding the right house can be a daunting task, particularly in a highly competitive market. It’s hard enough to find a house that has everything you want, let alone one within your budget.

It’s possible that you’ll find the right house at the right price point, but it’s listed as “under contract.” What does it mean when a house is under contract? And is there still a chance you can buy a house if it’s under contract?

Read on to get a full understanding of what under contract means in real estate and what to do if you’re in a situation where a house you’re looking to purchase is listed this way.

What Does Under Contract Mean In Real Estate?

Under contract means that a seller has accepted an offer on the property, but the sale isn’t final until all contingencies are met. It typically takes 4 – 8 weeks from the date an offer is accepted until the sale is complete.

There are several contingencies that may be outstanding on a property before a sale can happen. Let’s look at a few.

Financing Contingencies

One of the more common contingencies in real estate is a financing contingency. Essentially, the buyer has to be able to get financing through a mortgage or some other source in order to buy the home. In this case, the house will remain under contract until the buyer’s financing is approved.

Appraisal Contingencies

Houses under contract might also depend on an appraisal contingency. Mortgage lenders are unable to lend more than the appraised value of the property. If the appraisal is low and the seller isn’t going to come down to the appraised price, the buyer has to pay the difference between the amount the home appraised for and the actual sale price, which can become expensive when you factor in a down payment and closing costs.

Home Sale Contingencies

A home can also go under contract when a buyer agrees to purchase the new home contingent upon the sale of their current home. This helps so they don’t have to deal with multiple mortgage payments. The downside to this is that if the buyer doesn’t sell their home within a specified amount of time, they lose out on the home.

Home Inspection Contingencies

The final common contingency that keeps a house under contract is a home inspection contingency. The buyer and seller can write into any contract that the buyer gets to walk away for a major issue like the roof or HVAC system needing replacement. If so, the seller will have to find a new buyer who’s willing to deal with these things or make the upgrades themselves.

What Does Active Under Contract Mean In Real Estate?

When you see a home listed as “active under contract,” it means the home is under contract but the seller is accepting backup offers. Sellers are aware that it’s not a done deal until the closing paperwork is signed.

If something falls through with the initial offer, they may come back to your offer and you could end up getting the house.

Under Contract Vs. Pending: What’s The Difference?

In addition to “under contract” and “active under contract,” you may also see some houses listed as “sale pending.” Understanding the difference between the terms can be tricky since some real estate markets or listing services may use them interchangeably.

Most of the time, though, a pending status means that the seller has accepted an offer and all contingencies have been removed. The home sale may still be dependent on additional factors, such as the final inspection, but the seller typically doesn’t accept backup offers once the sale is pending.

When in doubt, talk to your real estate agent if you’re interested in a home with a pending status.

Under Contract FAQs

Let’s take a look at a few frequently asked questions regarding a house under contract.

Should I put a backup offer on a house under contract?

The main downside to putting in backup offers is that you’re taking time and effort to put together a proposal to buy a home that you typically have a slim chance of getting. Having your heart set on a particular house shouldn’t stop you from finding other houses that are actually on the market and could be right for you. Moreover, there’s always a reason a contract falls through, and it’s important to know what that reason is so that you can avoid any pitfalls.

If you do put in a backup offer, you obviously want to make it stand out. One way to do that is to offer more than the seller’s asking price.

How often does a house under contract fall through?

In most cases, people are buying a home with a mortgage. Because of this, they have to qualify for their financing. If their financial situation has changed since they were approved with a budget to shop for a home, they can be denied before closing. You can also have an appraisal come in low and not be able to reach a deal as a result. It’s even possible to fail an appraisal if the appraiser determines that anything in the home has to be remedied in order to avoid a health and safety issue.

If there are specific issues enumerated in the contract that let a person get out of the contract based on the home inspection, that would be another reason for a deal to fall through. Finally, buyers might make the purchase of their new home contingent on the sale of their previous one. In these instances, the previous buyer can lose out on their opportunity for a home if they can’t sell their current one in time.

What happens if the contract is canceled?

If the buyer fails to meet their obligations under the purchase contract within the specified time frame, that transaction will be canceled and other buyers will have the opportunity to purchase the home. However, now isn’t the time to jump at the chance to sign a contract and offer your earnest money deposit. You should do the legwork to find out why the previous contract didn’t work out.

If the house failed an appraisal or the home inspection revealed a major issue that the potential buyer didn’t want to deal with, you should be aware of it. Even if you decide to move forward with an offer, you’ll be doing so with the most information possible. This is always a better position to be in.

The Bottom Line: A House Under Contract Isn’t Always A Done Deal

If you found the perfect home but it’s under contract, it’s important to keep your chin up. Although most homes under contract do close, a variety of things can happen to give you another opportunity. While it’s important to understand why a home has fallen out of contract, the previous buyer’s loss could be your gain if there are no red flags and your backup offer gets accepted.

If you’re ready to begin your home buying journey and make an offer on your dream home, today.