Understanding Home Purchase Contracts

Understanding your Purchase Contract prior to making an offer is an extremely important step in successfully navigating the home buying process. Most people, including industry professionals, do not have a sufficient understanding of how home purchase contracts work. There are several components of Real Estate Purchase Contracts that you should pay particular attention to when buying a home. It is important to note that not all contracts are written the same. There are several standard templates that Realtors and Attorneys utilize, and these templates may tilt in specific sections in favor of the seller or buyer.

Additionally, contracts may be modified on a case by case basis. Below is an explanation of the basics, but we STRONGLY suggest you consult your Real Estate Attorney to understand the contract from a real estate law perspective. We also strongly suggest (as you’ll see below) that you send a draft of the contract to your Foundation Mortgage Originator to review it from a financing perspective. Note that once the contract is fully executed changes can’t be made without the seller’s consent. Preparation & Review by your professional advisers PRIOR to signing will help to ensure that you are protected and your transaction proceeds smoothly.

Real Estate Contracts are based on common law contract principles. The basic principles of: Offer, Counter Offer, and Acceptance apply. In most states there are standardized contracts used by real estate agents and attorneys.

The Offer

When you have found the house you wish to buy, the next step is to prepare an “Offer”. The Offer is typically drafted by your Realtor or Attorney. Prior to signing any offer you should do the following:

Review the basic offer terms with your Realtor
- Purchase Price
- Down Payment
- Loan Type
- Inclusion of contract contingencies for:
  - Inspection
  - Appraisal
  - Financing Contingency or Mortgage Commitment
- Additional Inclusions such as furniture, credits, and other requirements

Review the important milestone dates of the contract
- Deposit Due Dates
- Application for Financing
- Completion of Home Inspection
- Completion of Appraisal
- Financing Contingency/Mortgage Commitment Due Date
- Closing Date

Provide a copy of your contract to your Mortgage Originator to review prior to signing

Provide a copy of your contract to your Real Estate attorney to review prior to signing (if you have one)

It is important that you complete the above steps BEFORE you make your offer. Once your offer is submitted & accepted by the seller you can’t make changes without the seller’s agreement & written amendment/consent. Communication and coordination between your Mortgage Originator and Attorney and Realtor is important to make sure you are covered for the various perspectives of the parties involved in the process.

Your offer will contain an “Acceptance Date”, by which the seller needs to accept your offer or it will expire. If the seller does not accept the Offer by the Acceptance Date then your offer is considered cancelled.

The Counteroffer

Oftentimes a negotiation ensues after you have presented your initial Offer to a seller. Many items may be negotiated; such as:

Purchase Price
Deposit Amount & Timing
Closing Date
Financing Approval Deadline
Seller Credits to Closing Costs
Improvements or Repairs to the Property

Counteroffers can go back and forth several times between buyer and seller before the final terms are agreed upon.

Acceptance

Once the counteroffer stage has been completed and the final terms and conditions have been agreed upon by both buyer and seller, the contract is accepted. When the final version of the contract has been signed, dated, and initialed by the last party, the contract is considered in effect. This is called “The Effective Date” and the timeline to fulfill the various contract milestones begins. To be clear, the effective date of the purchase contract is considered to be the date the final signature is made.