Even after signing a real estate purchase contract, you can sometimes still cancel it under certain conditions. The two representative mechanisms are deposit-based cancellation (tetsuke kaijo) and the loan contingency clause (rōn tokuyaku), also called a financing contingency clause (yūshi tokuyaku). Both relate to canceling after signing, but their nature and the burden of canceling differ. Here we cover the basic ideas.
- Deposit-based cancellation lets the buyer cancel by forfeiting the deposit, or the seller cancel by repaying double the deposit, as long as the other party hasn't yet begun performing the contract.
- The loan contingency clause voids the contract with a full refund of the deposit if mortgage approval isn't obtained by the deadline.
- Cancellation via the deposit and cancellation via the loan contingency clause differ in nature, including whether any cost falls on you.
- Always check the contract for the clause's deadline and the conditions under which it applies.
- Cases such as not applying for a mortgage for reasons of your own can fall outside what the clause covers.
In short: how you're treated depends on the nature of the cancellation
Even though both let you cancel after signing, deposit-based cancellation and cancellation via the loan contingency clause are entirely different in nature. Deposit-based cancellation is a decision made by one of the parties and comes with a cost, whereas cancellation via the loan contingency clause is based on the objective fact that financing wasn't approved, and as a rule the full deposit is refunded. It's important to understand this difference.
How deposit-based cancellation works (what "commencement of performance" means)
Under the Civil Code, the buyer can cancel by forfeiting the deposit, and the seller can cancel by repaying double the deposit received, as long as the other party hasn't yet begun performing the contract. Case law tends to treat "commencement of performance" (rikō no chakushu) as the point when a concrete act has occurred — such as tendering part of the purchase price or preparing the registration transfer — so the window for this kind of cancellation narrows the longer time passes after signing.
How the loan contingency clause works
The loan contingency clause voids the contract and refunds the buyer's deposit in full if full mortgage approval isn't obtained by a deadline set at signing. For a buyer, it's an important safeguard against the risk of the mortgage falling through, and it's treated as essentially mandatory in any purchase contract financed with a mortgage.
The difference between deposit-based cancellation and the loan contingency clause
Deposit-based cancellation is a decision by one of the parties, and it costs the buyer the deposit they forfeit. Cancellation via the loan contingency clause, by contrast, is grounded in the fact that financing wasn't approved — as a rule, no penalty applies and the deposit is refunded in full. Even though both count as "cancellation after signing," you need to understand how differently heavy the cost can be.
Why it matters to check the clause's deadline and conditions
The contract specifies, for the loan contingency clause, the deadline by which mortgage approval must be obtained, and conditions such as the financial institution and loan amount it applies to. If approval is denied after that deadline, the clause may no longer cover you, so it's important to check the clause's deadline against your preliminary and full screening schedule. See Situations Where a Mortgage Application Struggles to Get Approved, and What to Do for how preliminary and full screening proceed.
Watch for cases where the clause doesn't apply
Cases such as not applying for a mortgage for reasons of your own, or being denied because you applied for a loan on different terms than the original contract specified, can fall outside what the loan contingency clause covers. Checking at signing exactly how specifically the clause's conditions are defined helps you avoid trouble after the fact. See From Purchase Offer to Price Negotiation: How It Actually Goes for how the process runs from offer to contract.
Frequently asked questions
Is it impossible to cancel once the contract is signed?
No, that's not the case. Deposit-based cancellation is possible as long as the other party hasn't begun performing the contract, and if mortgage approval isn't obtained, the loan contingency clause may let you void the contract. Each, however, has its own conditions and deadlines.
If I cancel via the loan contingency clause, does a penalty apply?
As a rule, no penalty applies, and the deposit you paid is refunded in full. Be careful, though, of cases the clause doesn't cover — such as not applying for screening for reasons of your own.
How is the deadline for deposit-based cancellation set?
Under the law, it's "until the other party begins performing the contract," but it's also common for the contract to set a specific deadline. It's reassuring to check the contract terms.
Summary
Deposit-based cancellation and the loan contingency clause both let you cancel after signing, but they differ in nature and in how heavy the cost is. Check the clause's deadline and conditions carefully in the contract, so you can avoid trouble you didn't see coming.