Terms to Watch for in a Purchase Contract
Every home sale starts with a home purchase agreement—a legally binding contract signed by homebuyers and sellers that confirms that they agree upon a certain purchase price, closing date, and other terms. While the forms and wording vary from state to state, there are certain words common to all that you’ll want to be familiar with. These terms are important as they contain crucial information including how much money you’re paying, when you pay it, under what conditions you can back out of the deal, and more The following are some key terms to watch out for in a purchase agreement, and why you need to check these provisions carefully before you sign.
The settlement date, or “closing,” is the day when all involved parties meet to make the sale official. Buyers and sellers typically negotiate a settlement date that is mutually agreeable. When choosing a settlement date, make sure you give yourself plenty of time to fulfill the home inspection, appraisal, and any other contingencies. If you don’t meet your obligations to the purchase agreement by the settlement date, you could be considered “in default” and potentially lose your deposit.
The possession date is the day when buyers can move into their new home. Sometimes home buyers take possession of the home on the day of closing, and sometimes they agree to wait days or weeks after closing. In general, 30 to 45 days is the most common time frame. The possession date is negotiable, and it can affect the strength of your offer. For instance, if the seller needs a few extra months to find a new place to live, offering a 60-day possession date could make your bid more attractive. Alternatively, some sellers allow the buyers to move in before settlement if the house is already vacant.
Earnest money (“good faith” money).
This is the money you, the homebuyer, commit to completing the sale to show the seller you’re serious about buying. Your purchase contract will require money immediately in the form of an earnest money deposit (EMD). The amount of the EMD is negotiable between both parties but is usually about 1-2% of the purchase price. Once an offer is accepted, the money is typically held by the seller's broker or a title company to be used as a credit toward the buyer’s down payment and closing costs. An EMD matters because, in an aggressive seller's market, many homes receive multiple offers. One way to make your bid stand out is to offer a slightly higher EMD (4-5%) to catch the seller’s attention. If you back out of the transaction for any reason or contingency outlined in the purchase agreement, you get your earnest money back. However, if you decide not to buy the house for any reason that is not included in the agreement, the seller can keep the earnest money.
Fixtures and appliances.
If you want the refrigerator, dishwasher, stove, oven, washing machine, or any other fixtures and/or appliances, don’t rely on a verbal agreement between the seller and don’t assume anything. Specify in the contract any fixtures and/or appliances that are to be included in the purchase. Check the list of items that the buyer expects to remain with the property and make sure it is acceptable.
A contingency in a deal is something the buyer has to do for the homebuying process to move forward, such as selling a property they already own. Contingencies can also include a home appraisal, home inspection, or mortgage approval. Contingencies protect you by giving you the ability to back out of the sale if something goes wrong, typically without losing your earnest money deposit. But all contingencies have deadlines that must be met in order for the transaction to proceed. Most buyers need to sell their existing home to purchase a new one, especially when “trading up” to a more expensive house. A home sale contingency gives buyers the time they need to sell and settle before committing to a new home.
While there are many other terms that will surely come up when buying a house and signing a purchase contract, these top five terms are ones you’re guaranteed to see.