What Does Under Contract Mean?

• In real estate, under contract means that a buyer has made an offer on a property, and the seller has accepted it. 
• In many cases, purchase offers are subject to one or more contingencies, which are conditions that must be met for the transaction to proceed, such as the buyer securing financing or accepting the results of the home inspection. 
• Once all contingencies have been met, the status of the transactions is changed to pending, and the sale is likely to close as planned.

While scanning listings of homes for sale, you may come across properties that are labeled “under contract.” Find out what that means and whether you can still make an offer on those homes.

What Does Under Contract Mean in Real Estate?

Under contract means that a property owner has accepted a buyer’s offer to purchase the property. Important terms, including the price, down payment amount, financing arrangements, and closing date, have all been preliminarily agreed to. 

However, the deal is far from complete when a property goes under contract.

The contract period (called the escrow period in some states) is the timeframe between getting the property under contract and officially closing the deal by transferring ownership to the new buyer. This period allows time for the buyer to complete their due diligence (confirming the condition and value of the property) and secure any mortgage financing needed. Most importantly, this period provides time for both parties to clear any contingencies (conditions that must be met before the deal can close) listed in the purchase agreement. 

Common Contingencies Encountered While Under Contract

The following are examples of contingencies commonly found in real estate purchase contracts.

1. Home Inspection Contingency

A home inspection contingency means the buyer must accept the results of a home inspection before the deal can proceed. A home inspection is an evaluation of the physical condition of the property by a licensed home inspector. The buyer has multiple options for clearing this contingency.^[1] They can:

• Accept the property in the condition outlined in the inspection report. 
• Request repairs based on the report’s findings.
• Renegotiate the price or request a financial concession to fund repairs.

If the condition of the property is not to their satisfaction, and they are unable to reach a satisfactory deal with the seller to clear the contingency, they can terminate the purchase contract. 

2. Financing Contingency

For buyers who need a home loan to complete the purchase, the purchase agreement should contain a financing contingency stating that the buyer has the right to cancel the contract if they cannot find satisfactory financing.

This is one of the reasons home sellers prioritize offers made by pre-approved buyers. Pre-approved buyers have had their finances reviewed by a lender to determine if they qualify for a loan and how much they can borrow. Selling to a pre-approved buyer reduces the chances of encountering a problem with the financing contingency. 

Some lenders also offer a pre-qual process, a streamlined pre-approval process that does not affect your credit score because it does not require a “hard pull” on your credit history. 

3. Appraisal Contingency

An appraisal is an assessment of a property’s value, according to a licensed real estate appraiser. With an appraisal contingency, the buyer has the option to negotiate a price reduction or withdraw from the deal if the home’s appraised value is lower than the agreed-upon sale price. 

Buyers who use mortgage financing for the purchase may be required to include an appraisal contingency in the purchase contract because the lender is typically unable to fund a loan in which the buyer is knowingly paying more than the property is worth. However, if the buyer is willing to pay the difference between the appraised value and the purchase price out of pocket (the appraisal gap), they may proceed with the deal at the agreed-upon purchase price. 

4. Current Home Sale Contingency

Some buyers make their purchase contingent on selling their existing home first. If they cannot sell their current home in time, their purchase deal could fall apart.

The main purpose behind a current home sale contingency is to make sure the buyers have the proceeds from the sale of their current home to fund the down payment and closing costs for the new home. However, sellers are wary of this type of contingency, so in a competitive market, they might decline the offers that include a current home sale contingency. Buyers who are concerned about cash-flow issues from the timing of their current home’s sale may want to consider financing alternatives like bridge loans or home equity-based financing.

5. Title Contingency

A title contingency requires the property to have a clear title report before proceeding with the deal. A clear title report means that there are no known ownership disputes or claims against the property. Any clouds on a title would need to be addressed before closing. 

6. Insurance Contingency

Buyers may require confirmation that they can obtain homeowners insurance, particularly if the property is to be mortgaged. Additional policies may be required due to increased risks in certain areas. For example, buyers may need flood insurance if the property is located in a floodplain.^[2] If the buyer cannot secure the required insurance coverage, the sale may fall through.

7. Homeowners Association (HOA) Contingency

For homes in a community governed by a homeowners association, buyers may include an HOA contingency. This contingency allows the buyer to review the HOA’s CCRs (Covenants, Conditions, and Restrictions) and cancel the deal if they find the HOA’s regulations unacceptable.

Under Contract vs Pending

Pending means that all contingencies have been met, and both parties are proceeding with the transaction. 

A pending deal has not yet been finalized, but it is highly unlikely to fall through once the contingencies have cleared.

Can You Make an Offer on a House Under Contract?

By some estimates, around 6% of purchase contracts are canceled before they close.^[3] So, sellers may be willing to entertain backup offers. 

If you decide to make an offer on a house under contract, it is important to understand that:

• The probability of the current contract being terminated is low.
• If the current contract is terminated, you should conduct thorough due diligence to make sure the termination was not the result of a property defect. 
• It is best to explore other options to avoid missing an opportunity while waiting to see if this deal proceeds.

The Bottom Line

While most homes under contract proceed to close, some purchase contracts are canceled because of a contingency that cannot be met. 

If you fall in love with a home that is under contract, find out if the seller is willing to consider backup offers. By placing a backup offer, you could be next in line in case the current contract falls through for any reason. 

The best way to be ready to make an offer is to get pre-approved for a home loan before starting your home search. The pre-approval can inform your budget and strengthen your purchase offer by assuring the seller that you are likely to qualify for the financing needed to close the deal.