About 5–10% of real estate contracts fall through before closing. If it happens to you, it's not the end. Knowing what to expect and how to protect yourself beforehand is crucial.
Why Deals Fall Apart
Most deals that fall apart do so for one of these five reasons:
1. Financing falls through.
The buyer was pre-approved but something changed: they lost their job, opened new credit accounts, or the property didn't appraise at the purchase price. Lenders re-verify employment and credit shortly before closing. Changes between pre-approval and closing can kill the loan.
2. The inspection reveals something serious.
The inspection report comes back with a major issue — foundation problems, significant water damage, a roof that needs immediate replacement — and the buyer and seller can't agree on how to handle it.
3. The appraisal comes in low.
The lender's appraiser values the home below the purchase price. The lender will only finance based on the appraised value, leaving a gap that someone has to cover.
4. Title issues.
The title search reveals a lien, an ownership dispute, or another problem that prevents the seller from conveying clear title to the buyer.
5. Buyer or seller gets cold feet.
Sometimes one party simply decides they don't want to proceed. What happens to the earnest money depends on the circumstances and the contract terms.
What Happens to Your Earnest Money
Earnest money is the deposit you made when your offer was accepted — typically 1–3% of the purchase price. It's held in escrow and applied toward your down payment or closing costs at closing. If the deal falls through, what happens to it depends on why.
If you have a contingency that covers the reason the deal fell through:
You get your earnest money back. This is the whole point of contingencies.
• Financing contingency: If you can't get the loan, you can walk away and get your deposit back.
• Inspection contingency: If the inspection reveals issues you can't resolve with the seller, you can walk away and get your deposit back.
• Appraisal contingency: If the home appraises below the purchase price and you can't renegotiate, you can walk away and get your deposit back.
If you walk away without a contingency to cover it:
You typically lose your earnest money. This is the risk of waiving contingencies.
If the seller backs out:
If the seller terminates the contract without a valid reason, you're entitled to your earnest money back — and potentially more, depending on your contract and state law. Some contracts allow buyers to sue for specific performance (forcing the sale) or damages.
The Inspection Contingency: Your Most Important Protection
The inspection contingency gives you the right to have the home professionally inspected and to negotiate repairs, credits, or a price reduction based on the findings — or to walk away entirely.
When the inspection reveals issues, you have several options:
Ask the seller to make repairs. The seller hires a contractor and fixes the issues before closing. The risk: you don't control the quality of the repairs, and the work may not be done to your satisfaction.
Ask for a credit at closing. Instead of repairs, the seller reduces the purchase price or gives you a credit at closing that you use to make the repairs yourself. This is often a cleaner approach than asking for repairs.
Renegotiate the purchase price. If the inspection reveals that the home needs significant work, you can ask the seller to reduce the price to reflect the cost of that work.
Walk away. If the issues are serious enough and the seller won't negotiate, you can terminate the contract and get your earnest money back.
What you cannot do: use the inspection contingency as a general escape hatch to back out of a deal you've changed your mind about. Courts have held that buyers must act in good faith — the inspection contingency is for material issues discovered during the inspection, not buyer's remorse.
The Appraisal Gap: What to Do When the Home Appraises Low
If the home appraises below the purchase price, you have a problem. Your lender will only finance based on the appraised value. If you agreed to pay $420,000 and the home appraises at $400,000, your lender will loan based on $400,000. You have to cover the $20,000 gap somehow.
Your options:
Renegotiate the purchase price. Ask the seller to reduce the price to the appraised value. In a buyer's market, sellers often agree. In a seller's market, they often don't.
Pay the gap in cash. If you have the cash and the house is worth it to you, you can cover the difference out of pocket. This is called an "appraisal gap guarantee" — some buyers include this in their offer to make it more competitive.
Challenge the appraisal. If you believe the appraisal is wrong, you can ask your lender to request a reconsideration of value. You'll need to provide comparable sales data that supports a higher value. This sometimes works; often it doesn't.
Walk away. If you have an appraisal contingency and can't resolve the gap, you can terminate the contract and get your earnest money back.
What to Do After a Deal Falls Through
Give yourself a day.
A deal falling through is genuinely disappointing. You've invested time, money (inspection fees, appraisal fees), and emotional energy. It's okay to be frustrated. Take a day before you start making decisions.
Understand what happened and why.
Was it something you could have anticipated? A financing issue that could have been caught earlier? An inspection issue that was visible during the showing? Understanding the cause helps you avoid the same problem on the next house.
Assess your financial position.
You've spent money on the inspection and possibly the appraisal. You may have spent money on movers or storage. Understand where you stand before you start looking again.
Get back in the market.
The house you lost is not the only house. It felt that way, but it wasn't. There will be another one. The buyers who recover fastest are the ones who stay in the market rather than taking a long break to mourn the deal that didn't happen.
How to Protect Yourself Before It Happens
Keep your finances stable between pre-approval and closing.
Don't quit your job. Don't open new credit accounts. Don't make large purchases on credit. Don't move large amounts of money without telling your lender. These are the most common reasons financing falls through.
Don't waive contingencies without understanding the risk.
In competitive markets, buyers sometimes waive inspection or appraisal contingencies to make their offer more attractive. This is a real strategy, and sometimes it's the right call. But it means you're taking on the risk that those contingencies were designed to protect against. Make that decision with full information, not because your agent suggested it offhand.
Have cash reserves.
If the appraisal comes in low, having cash reserves gives you options. If the deal falls through and you need to start over, having cash reserves means you can keep moving.
Read your contract.
The purchase agreement defines what happens in every scenario — what triggers the contingencies, what the deadlines are, what happens to the earnest money. Read it before you sign it. Ask your agent to explain anything you don't understand.
Actionable Steps
Protect your earnest money. Ensure your contract includes necessary contingencies (inspection, financing, appraisal) so you can walk away with your deposit if the deal falls through for a valid reason.
Don't get emotionally attached. Until the keys are in your hand, it's just a business transaction. Be prepared to walk away if the inspection reveals major issues or the appraisal comes in low.
Stay financially ready. Keep your finances in order even after your offer is accepted. Use ARRO to maintain your readiness so you can quickly pivot to a new property if necessary.
Frequently Asked Questions
How common is it for home deals to fall through?
Estimates vary, but roughly 5–10% of real estate contracts fall through before closing. The most common reasons are financing issues, inspection problems, and appraisal gaps.
Can I sue the seller if they back out?
It depends on your contract and state law. Most purchase agreements give buyers the right to their earnest money back if the seller terminates without cause. Some contracts also allow buyers to sue for specific performance (forcing the sale) or for damages. Consult a real estate attorney if you believe the seller terminated improperly.
What if I lose my earnest money?
If you terminate the contract without a valid contingency, you typically lose your earnest money. This is one of the most painful outcomes in a real estate transaction. Understanding your contingencies before you waive them is crucial.
How long does it take to get my earnest money back?
It depends on the circumstances and the escrow holder. If both parties agree to the termination and the return of funds, it typically takes a few days to a week. If there's a dispute, it can take much longer — sometimes requiring mediation or legal action.
Should I start looking at other houses while my current deal is still pending?
It's not uncommon for buyers to keep an eye on the market while under contract, especially if the deal feels uncertain. But making an offer on another property while under contract on a first property creates complications. Talk to your agent about your specific situation. ARRO is built to guide you through this process. Our platform helps you organize your readiness and matches you with vetted buyer's brokers who will fight for your interests.
Haj Khalsa is the founder of ARRO, Creative Acorn, and HANGTIME — a Santa Fe-based outdoor lifestyle brand. He is also a rock climber, telemark skier, and dad.