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Consult with your Realtor and ask him how you can cancel the contract. In some states, such as Texas, if you choose to cancel rather than allow the seller to fix the problems in the report, you will lose your "earnest" money, or deposit. In other states, you may not be able to cancel the contract if you decide to cancel outside of the time frame given in the contract; for instance, if you have ten days to cancel and you cancel on the eleventh day, you may be legally obligated to follow through with the purchase. Ask the Realtor to outline the consequences of canceling the contract.
Inform your Realtor that you wish to cancel the contract. She can prepare the cancellation paperwork and advise you what to
do next. In some cases, the Realtor can act on your behalf and cancel the contract but in other states you may have to notify the seller personally.
Prepare a letter to the seller that lists the items that were not approved in the house, and states that you wish to cancel the contract. Ask your Realtor to look over the letter to ensure that it meets the state and local laws for the cancellation notice.
Ask your Realtor how to deliver the notice. In most cases, he will ask you to mail the letter via registered mail to the seller and mail another letter to the seller's Realtor, if he is using one.
Notify your mortgage company, if you were pre-approved for the property, that you will not be purchasing the home.