Can You Cancel a New Home Construction Contract? 

Did you sign a contract to build a new home and now you want to cancel the new home construction contract? Do you know if you can cancel the new home construction contract? Can you get your money back? Will you still have to pay the builder? Can the builder cancel the contract?

These are questions that most new home construction buyers don’t think much about before contracting to build a new home. However, the answers to these questions significantly impact the new home buyer.

Buying a new construction home comes with just as many risks as benefits. However, unlike buying an existing home, buying new construction disproportionally shifts a significant amount of those risks on the buyer. New home construction buyers are often so excited about the prospects of building a new home, that they don’t carefully read the builder’s contract for termination language. In many cases, the issues that might lead to contract termination are the farthest thing from the new home buyer’s mind when signing the construction contract.

However, sometimes things happen that will lead a new construction buyer to terminate the contract with the builder, or lead the builder to terminate the contract with the buyer. You can also watch our YouTube Video:

Reasons you may want to cancel or terminate your new home construction contract

1. 1. Change of financial circumstance
      • Loss of income
      • The income was needed to qualify for or pay for the mortgage.
   2. Health emergency
      • The homeowner experiences a health emergency, hospitalization or crisis that makes continuing with the new home construction contract impossible.
   3. Financing denied
      • The homeowner does not qualify for financing for the new home construction mortgage at the time of closing.
   4. Sticker Shock
      • The final price of the home after adding upgrades, fees and other costs, is greater than the homeowner can afford.
      • Interest rates rose after the builder contract was signed. The homeowner can’t afford the higher payment.
      • The homeowner didn’t realize the future total mortgage amount, including insurance and taxes, when looking at the initial mortgage estimate. Taxes on the completed home are much higher than tax estimated before the home was finished. Now the homeowner can’t afford the higher mortgage payment.
   5. Appraisal value lower than expected
      • As a result, the new home contract amount is more money than the homeowner can borrow from the lender. The homeowner is on the hook for paying the builder the full contract amount (the difference between the loan amount and the contract amount).
   6. Change of Planned Location
      • New home construction contract was signed because the homeowner was moving to take a new job and the job offer was revoked.
      • New homeowner is reassigned to a new job in a different city, state or country and has to cancel the new home construction contract.
      • The new homeowner has a family emergency such as care of a parent, child or family member that makes continuing with the new home construction contract impossible.
   7. Builder Performance Issues
      • Delays/missed milestones
        1. The builder fails to meet completion milestones that significantly delay the home completion date without reasonable cause. The contract will specify what types of delays and length of delays are reasonable (weather, supply chain issues, etc.).
      • Substandard workmanship
        1. If the contract specifies that the builder has to use certain materials or meet certain quality standards, and the builder fails to meet those quality standards.
      • Failed inspections/failure to meet building codes/wrong plans
        1. If the builder failed to build according to building codes, or obtain the required permits.
        2. Builder builds the wrong floor plan or elevation. The builder builds the incorrect floor plan, elevation, or makes a significant structural error. You don’t want the house and you want to cancel the new home construction contract.

Reasons your builder may want to cancel or terminate your new home construction contract

1. Failure to close on the house time
   • The contract may specify a date or a specific period of time during which you must close on the completed home. If you fail to meet this deadline, the builder may cancel the new home construction contract.
2. Failure to secure financing by the required deadline.
3. Failure to meet response deadlines for signing or reviewing paperwork.
4. The home increased in value during contract performance:
   1. The builder contracted with you for $600,000 but at completion, the value of the house is $700,000. The builder wants you to pay more money or else the builder will cancel the new home construction contract with you.

Will you get your earnest money deposit back if you decide to cancel the new home construction contract?

Maybe, and maybe not. It all depends on what the contract says about your reason for cancelling, and the timing of when you decide to cancel the contract. Are you cancelling within days of signing the contract, or do you want to terminate the contract within days of closing on the completed home? Is there a contract provision that covers your reason for cancelling? Is there anything in the contract that says the builder gets to keep your deposit?

According to the article by Audrey Win, Can You Back Out of a New Construction Home Contract? a home buyer needs to take the following factors into consideration:

• How far are you into the project?
• Has ground been broken yet?
• Have you made structural or finishing upgrades?
• How much earnest money has been deposited?
• Has the market gone up or down in your development?
• Will you qualify for your mortgage at closing?

Will you get your earnest money deposit back if the builder decides to cancel the new home construction contract?
Maybe, and maybe not. It all depends on the builder’s reason for cancelling the contract and what the contract says on the issue of contract termination. Most builder contracts will indicate under what circumstances the builder can terminate the contract, and whether the buyer is entitled to a refund of deposits.

Sometimes the contract includes provisions indicating that the builder can terminate the contract for any reason at all at any time and keep the buyer’s deposits. Other times, a builder’s contract may indicate that if the builder fails to meet a particular obligation, the buyer is entitled to a refund of deposits.

Note that there may also be contract provisions that state that if the builder cancels the contract due to a failure of the buyer to meet an obligation, the builder may keep the deposits and the buyer may owe the builder additional money.

What should I look for in the contract to determine if the buyer or the builder can cancel the new home construction contract?

1. Does the contract include an option period? The option period is a period during which the homeowner buyer can terminate the contract for any reason. If there is an option period, it would be a few days from the date of contract signing.
2. Does the contract include financing contingencies? A financing contingency will allow the new homeowner buyer to withdraw from the purchase contract if they cannot secure necessary financing by a certain deadline. The contract may also include consequences of failure to obtain financing – which could include forfeiting earnest money and/or design center deposits.
3. Does the contract include construction milestones and consequences of delays? The construction milestones will describe the steps toward completion and the timing of those steps. The delay provisions will describe what kinds of delays are attributable to the buyer and the consequences to the buyer for those delays. The contract may also include what kinds of delays are attributable to the builder. The contract may also describe the kinds of delays that are outside the builder’s control (natural disaster, market forces, weather) and are reasonable, vs. unreasonable delays.
4. Are there consequences of failure to close on time? The contract may specify what happens if you fail to close by a certain date, or within a few days of that date. The contract may also specify what happens if the failure to close is the builder’s fault.
5. Does the contract include contingencies for termination due to loss of income, health or family emergencies? Does the contract include any language that states whether you can terminate for any of these reasons? Is there a particular time frame during the completion of the house where terminating for these reasons is or isn’t possible?
6. Does the contract cover when and how I can get my earnest money refunded? What about my design center deposit? Does the contract specify if the builder keeps some or all of this money if I terminate after a certain date, or for a certain reason?
7. Does the contract include any statements that discuss the circumstances under which I would owe the builder additional money? Does the contract state whether there any payments or fees associated with terminating the contract?
8. Can the builder charge more money for the house or cancel the contract if the value increases before closing? If the value of the house increases to more than the contracted amount before closing, some builders have asked the new homeowner to pay a new higher price for the house or risk termination of the contract.
9. Does the contract include the builder’s regulatory or compliance obligations? Builders are obligated to follow building codes, obtain permits, and adhere to safety regulations. Building codes ensure construction meets minimum standards for safety and structural integrity. Non-compliance can result in fines, penalties, or even demolition of non-compliant structures. Builders must also secure permits to avoid delays and additional costs. (cite)
10. What recourse does the new homeowner have if there is a legal dispute? Some contracts include language stating disputes must be settled during arbitration, or if disputes can be settled in court.
11. Are there certain ways in which the new buyer cannot complain? Some builders’ contracts may have “non-disparagement” clauses. These clauses state that the new homeowner can’t post negative comments or complaints online or give negative reviews.
12. Does the contract have a convenience clause? A convenience clause states that the seller (the builder) can cancel the contract “for convenience,” which means for any reason.

What do I do if I am considering terminating the new home contract?

•  Audrey Win recommends in, Can You Back Out of a New Construction Home Contract? to talk to your builder: She recommends:
  • “If you haven’t broken ground and no structural and finishing upgrades have been purchased, there is more room to negotiate with your builder. If the market is priced a little higher than when you purchased the build – it may work in the favor of the builder. In an appreciating market, the builder can still sell your build to someone else (considering they have people ready to buy) and let you off the contract. 
  • A development that is close to closing will be hard to get out of – because a ton of work has already gone into the project. If the upgrades you made are not popular with today’s buyers, it may be even harder to unload the property with the builder. A home builder may still be willing to work with you to get you off the contract – but you stand to lose even more money since by now; you would’ve made a 10% – 20% deposit. In this option, you stand to lose any deposits you have made for the home. If a contract is being voided/nulled – get it in writing.”

I recommend consulting an attorney. It can be expensive but it may be worth it. Existing home resale Contracts usually more evenly cover the rights of both buyer and seller. However, new home construction contracts are notoriously one-sided. The builder’s legal representatives write new home construction contracts to protect the builder’s legal and financial interests. You may not have the money to pay for a full-fledged legal battle. However, you may be able to pay for representation when negotiating with the builder to terminate the contract.

I hope you don’t need to cancel your new home construction contract. If you do, I hope this information is helpful. Best Wishes.