OPTIONS IN THE ONE TO FOUR FAMILY RESIDENTIAL CONTRACT
Options in the one to four family residential contract are used to give the buyer the chance to exit the contract for any reason. Any reason - good, bad or ridiculous. Doesn't matter. During that option period, the buyer can end the deal and not lose any earnest money. The option fee is non-refundable.
The Option is also used to pressure the buyer to hurry up with inspections. Option periods are usually 10 days. During that time, the buyer has to have the home inspected and then demand that any problems or defects be cleared up during that 10 day window. If they are not, then the buyer can then terminate the earnest money contract and get their earnest money back no questions asked. This can be good for the buyer.
But it can also be used to pressure the buyer into staying with the deal once that option period expires. The buyer is led to believe that there is no other choice but to fulfill the contract and buy the property. While this is more or less true, there are two ways that deals can be killed before closing without the buyer losing her earnest money.
One is that the house does not meet appraisal. When this happens, the lender won't fund the loan for the purchase at the stated contract price. The seller can lower the price of the house to meet the appraisal. Or the buyer can terminate for lack of funding.
Another way that is very similar is that the buyer can not get the necessary financing regardless of appraisal. Most people pre-qualify before making offers so this is not used often. But if a buyer wants to exit a deal, they can advise their lender or mortgage broker that they won't be able to afford that particular house and the lender may send a letter indicating that the buyer does not qualify for the purchase of that house. If the buyer has a good relationship with their mortgage broker, they can move on to another home and reestablish qualfications for the loan for a new property.