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What is Right of Rescission in Real Estate?

Instructor: Racquel Fulton

Racquel is a Real Estate Licensee and holds a New Jersey Title Insurance Producer Certification

Canceling an appointment or a magazine subscription is easy, but how does it work if you want to cancel a real estate contract? In this lesson, we will explore how rescission works in real estate.

The Deposit Dilemma

Carrie found the home of her dreams, signed a contract, and put down a deposit. The earnest money deposit, which is what Carrie used, is a small portion of the purchase price and proves that she intends to keep her end of the deal. If she fails to do so, the deposit may end up in the seller's hands. However, a home inspection has revealed that her dream home may be a potential nightmare. So, how can Carrie make an exit without allowing her deposit to be carried away?

Fortunately, Carrie has the right of rescission. She may rescind (cancel) the contract if certain conditions are not met.

Contract Contingencies

Conditions in a real estate contract are known as contingencies. Very often the sale of a property is not finalized until some of the following types of contingencies are met:

  • Good faith contingencies require that the buyer and seller be honest. If either one commits fraud or misrepresentation to induce the sale, such as a seller lying about the condition of a roof, it is immediate grounds to rescind the contract.
  • Specific contingencies arise from special circumstances, such as a sale being contingent on the seller repairing a garage door.
  • Legal Contingencies are a result of state and federal laws. For example, in New Jersey after a buyer and seller sign an agreement of sale, the contract is contingent upon a three-day attorney review period. If one attorney disputes any part of the contract, the agreement may have to be revised or rescinded.
  • Customary contingencies originate from standard practices within the housing industry. The sale of a home may be contingent upon a homebuyer receiving a satisfactory home inspection or getting approved for a mortgage loan.

Although Carrie's ability to get a mortgage may be a contingency of her contract to buy the home, after she agrees to the mortgage that agreement cannot be rescinded. Under the law, a mortgage, which is a pledge of property as collateral for a loan, has different rules based on its classification. A mortgage classified as a purchase money mortgage because it is used to purchase property does not include the right to cancel. However, there is another kind of mortgage that does include the right to cancel.

The Right to Cancel

A homeowner who takes out a mortgage for a home they already own is refinancing. Under Regulation Z, the Truth in Lending Act (TILA) of 1968, a mortgage classified as a refinance must provide the homeowner with three business days to cancel. The three-day right of rescission only applies if the home is a primary residence. A refinance of a second or vacation home does not provide a right to cancel.

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