Definition:
Rescission is the legal right to cancel or undo a real estate contract or loan agreement, usually within a specific time frame, without penalties.
Example:
After signing a loan agreement to refinance her home, Karen changed her mind the next day. Because it’s a refinance of her primary residence, she has a three-day right of rescission. She sends written notice to the lender within the three-day window, and the loan is canceled with no fees.
Explanation:
Rescission gives borrowers or buyers the opportunity to cancel certain real estate contracts if they have second thoughts or discover new information. The most common use of rescission is in mortgage refinancing or home equity loans for a primary residence. Under the Truth in Lending Act (TILA), borrowers have three business days after signing the agreement to rescind, or cancel, the loan.
To exercise the right of rescission, the borrower must submit a written notice to the lender within the allowed time. The lender must then return any money paid and cancel the loan obligation. The right of rescission does not apply to new home purchases or investment property loans—only certain types of refinancing or home equity loans for a primary residence.
In purchase contracts, rescission may also occur if certain contingencies (like financing or inspection) aren’t met. This allows buyers to legally back out without losing their earnest money deposit.
Why is Rescission Important in Real Estate Transactions?
Rescission protects consumers by giving them time to reconsider big financial decisions and avoid being locked into contracts under pressure. For homeowners refinancing, it’s a safeguard against unfavorable terms. For buyers, it can prevent financial loss when issues arise. Understanding this right helps both parties navigate real estate transactions with confidence and flexibility.