Understanding a Home Purchase Agreement

Editor's note: This post was originally published June 9, 2021, and has been updated for accuracy, comprehensiveness and freshness on May 20, 2025.

When buying or selling a home, one of the most important documents you'll encounter is the home purchase agreement (or purchase real estate contract). This legally binding contract serves as the foundation for your entire real estate transaction, yet many people sign without fully understanding its implications.

We asked Mary Kinsley, LegalShield provider lawyer with Davis Miles, to weigh in on the hefty subject of residential home purchase agreements. She gave us some great insight, helping lay out the basics so you can deal with a home purchase agreement with confidence.

"A home purchase agreement is an agreement between a buyer and a seller of a residence setting forth all the terms for the sale to proceed,” explains Mary. “Unlike most contracts, there is usually a fairly long period of time between when the parties agree to the sale, and when the sale actually occurs."

What is a home purchase agreement?

A home purchase agreement is a critical document in a home sale. It acts as a contract for the sale and purchase of real estate, protecting both the buyer and the seller by clearly defining each parties’ obligations and duties. These details include responsibilities, expectations, and contingencies before closing the deal.

"The home purchase agreement is entered into between the parties once they've agreed, in principle, to the sale,” Mary explains. “Then, one or both parties need to fulfill all the conditions for the sale to proceed." All of these terms should be in writing so that everyone knows what is necessary for the sale to happen, and neither party can be accused of breaching the agreement."

Whether you're buying your first home or your fifth, understanding what goes into this contract can help you avoid costly mistakes and legal complications down the road.

When do you need a purchase agreement?

A purchase agreement is necessary in virtually all real estate transactions, including:

• Private sales between individuals
• For Sale By Owner (FSBO) transactions
• Traditional real estate deals involving agents and brokers
• New construction purchases
• Commercial property transactions

Without a properly executed purchase agreement, neither party has legal protection if something goes wrong during the transaction.

Who prepares the home purchase agreement?

Depending on your situation, any of these parties might draft your home purchase agreement:

• Real estate agents/brokers: Often provide standardized forms but cannot offer legal advice
• Real estate attorneys: May be required in some states; they customize agreements to address specific legal needs
• Title companies: Sometimes assist with preparing documents, especially when handling the closing process
• Buyers and sellers: In private sales, parties may draft their own agreements (though professional review is highly recommended)

"Generally speaking, in the western states (that is, most of the states west of the Mississippi River) home purchase agreements are negotiated and prepared by real estate agents. In most other states, home purchase agreements are prepared by attorneys," says Mary. "It's especially important in states where attorneys are not usually involved in the negotiation and sale, so that your LegalShield attorney can explain the process and help you understand and negotiate the best terms."

It's worth noting that requirements vary by state—some jurisdictions mandate attorney involvement, while others allow standardized forms.

5 essential elements of a home purchase agreement

1. Purchase price and payment terms

Every home purchase agreement must clearly state:

• The total purchase price
• Initial earnest money deposit amount
• Financing method (cash, conventional mortgage, FHA loan, etc.)
• Down payment amount and timeframe
• Closing cost responsibilities

2. Earnest money details

Earnest money serves as a good-faith deposit showing the buyer is serious about purchasing the property. Your agreement should specify the deposit amount, typically 1-3% of the purchase price. It must also lay out where these deposit funds will be held and how they will be refunded if necessary.

Make sure the agreement includes details on what will happen if the buyer backs out without a valid contingency.

3. Property description and inclusions

A thorough home purchase agreement will include:

• Complete property address and legal description
• Clear listing of what's included in the sale (appliances, fixtures, etc.)
• Specific mention of any items being excluded
• Property boundaries and any easements

4. Contingencies and conditions

Contingencies are critical clauses that allow either party to exit the agreement under specific circumstances.

"One of the words you will hear in connection with the home purchase agreement is 'contingency' or 'contingencies.’ This just means the things that need to happen before the agreement becomes binding on the parties," says Mary.

Common contingencies include:

• Home inspection: Allows buyers to back out if serious defects are discovered. As Mary explains, "Sometimes a home can look great, but have hidden problems that don't reveal themselves right away. This contingency allows the buyer to have a professional inspection performed on the home before they buy it. If the inspector finds major problems, the buyer can negotiate for repairs, request a price reduction, or if the flaws are serious enough, back out of the contract entirely."
• Financing: Protects buyers if they cannot secure a mortgage. "Most people do not have the cash on hand for a home purchase and must finance it with a mortgage. This contingency allows the buyer to back out of the sale if they are unable to qualify for a loan within a certain amount of time," notes Mary.
• Appraisal: Ensures the home is valued at or above the purchase price. Mary adds, "If you are getting financing, the lender will want an independent home appraiser to provide them with a report that informs them as to the condition of the property. This protects the lender's investment."
• Title: "You want to make sure that the person selling you the home actually has the legal right to do so, and that there are no liens or judgments attached to the home. A title company does this research and prepares an independent title report verifying this," Mary explains.
• Home sale: Gives buyers time to sell their current home before finalizing the purchase.

5. Closing date and possession

"Once the parties have fulfilled all the conditions, the sale goes through at something called a closing, which is when the money is released to the seller, and the buyer receives title to the property," explains Mary.

This section establishes when the transaction will be finalized; the exact date and time when the buyer will take legal possession; and consequences if either party delays the closing.

Legal requirements for a valid home purchase agreement

"In most states, in order to be an enforceable contract, a home purchase agreement must be in writing, signed by the buyer and seller, and include the price, the closing date and a clear description of the property," explains Mary.

"Additionally, a well-written home purchase agreement will include the buyer and seller's information, whether the sale includes things like large appliances, any contingencies that need to happen, and any disclosures required by law in the state where the property is located."

For a home purchase agreement to be legally binding, it must meet several requirements:

• Offer and acceptance: Both parties must clearly agree to the terms.
• Consideration: Something of value must be exchanged for something else (usually money).
• Legal capacity: All signing parties must be of legal age and sound mind.
• Compliance with laws: The agreement must follow state and federal regulations.
• Property disclosures: Sellers must disclose known defects or hazards as required by law.

Legal risks to watch out for

Even a seemingly straightforward home purchase agreement can contain pitfalls:

• Breach of contract: What happens if either party fails to meet obligations
• Forfeited deposits: Under what circumstances a buyer might lose their earnest money
• Undisclosed issues: Legal implications if sellers fail to reveal known problems
• Hidden costs: Unexpected fees that might arise during closing
• Misrepresentation: Consequences for providing false information about the property

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Steps to finalizing your home purchase contract

1. Negotiation: Buyers and sellers may work through agents or attorneys to reach acceptable terms.
2. Legal review: Have a qualified attorney review the agreement before signing (highly recommended).
3. Signatures: All parties sign the finalized document.
4. Escrow period: This is the time between contract signing and closing during which contingencies are addressed.
5. Closing: Sign final documents and transfer funds.
6. Recording: File the deed and mortgage with local authorities.

How LegalShield can help protect your home purchase

Navigating the complexities of a home purchase agreement doesn't have to be overwhelming. LegalShield provides affordable legal access for both buyers and sellers during real estate transactions. A LegalShield Membership gives you access to a provider law firm in your area that can help with various areas of law, including important real estate and legal document work like a home purchase agreement.

"As always, your LegalShield plan works best the earlier you call us. If we review a home purchase agreement early in the process before you sign it, we can suggest changes and ideas to benefit and protect you and help make the home buying process as smooth as possible," advises Mary.

With a LegalShield Membership, you gain access to experienced attorneys who can:

• Review your home purchase contract before you sign.
• Schedule consultations to address your specific concerns.
• Provide consultation throughout the buying or selling process.
• Help negotiate terms and contingencies.
• Ensure compliance with state-specific regulations.
• Identify potential legal issues before they become problems.

"We can provide you with insight into the process and what to expect along the way," Mary notes. "Buying a home, whether it's your first home starting out, an upgrade, or vacation home, should be fun and exciting, and the earlier you involve us in the process, the more we can help you avoid potential problems and pitfalls, and smooth the bumps in the road to homeownership."

LegalShield provider law firms can provide the guidance you need for an affordable monthly cost.

Don't sign a home purchase agreement without understanding every line. With LegalShield, professional legal advice is just a phone call away.

For more information about how LegalShield can assist with your real estate transaction, visit www.legalshield.com/real-estate.

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