Common Contingencies Home Buyers Should Know
For most people, buying a home will be one of the most expensive purchases of their lifetime. As such, it’s important buyers protect themselves during the home buying process. One way to do so is to ensure important contingency clauses are added to the contract as a safeguard against the unexpected.
Here, we’ll break down everything you need to know about home contingencies as well as some common contingencies home buyers should know about.
What is a Contingency?
During a typical real estate transaction, the buyer will present an offer, and the seller will either accept the offer outright or propose a counter-offer, going through rounds of negotiation until both parties agree on a price. Once both parties have agreed, the buyer will usually put down an earnest money deposit, typically 1-2% of the sale price, to show they’re a serious and trustworthy buyer. The earnest money deposit, also known as a good faith deposit, is then held by a neutral third party, generally a licensed real estate agent, title company, or escrow company, and the closing process begins.
This is where contingency clauses come in.
Contingencies are clauses added into a purchase agreement that allows both parties to back out if certain criteria are not met. In simple terms, the sale of the home is contingent upon these specified conditions. When adding contingency clauses to a contract, both parties must agree to them and sign said contract before it becomes legally binding.
During the closing process, if any contingency is not met, the contract becomes null and void, and one party, typically the buyer, can back out of the deal without any legal consequences. If it’s the seller that faults on a contingency, the buyer will receive their earnest money deposit back. However, if the buyer is the one to violate the contract, they will likely lose their deposit and walk away with nothing. In this way, contingencies act as a safeguard for both buyers and sellers against bad deals.
Common Contingencies
While there are numerous types of contingencies that can be added to a contract, there are a few common contingencies home buyers should know about.
Title Contingency
In real estate, a title is the legal right to ownership of the property with the title changing hands every time the property is bought or sold.
During the closing process, a title company conducts a search of public records to ensure there are no liens or other legal claims to the property and that the current owner has the right to sell the property. If the search of public records shows there is a dispute with the title, a title contingency allows the buyer to back out of the deal with no legal blowback and typically their earnest money deposit.
Home Inspection Contingency
Another common type of contingency is a home inspection contingency. This contingency allows the buyer to back out of the deal if the home inspection reveals any significant problems with the property such as a leaky roof or faulty HVAC system. A home inspection contingency can also allow a buyer to request repairs or concessions in order for the deal to move forward, depending on the terms of the contingency. It’s also important to note that with a home inspection contingency, it’s the buyer’s responsibility to find an inspector and schedule an inspection within a specified period of time per the contract.
Appraisal Contingency
An appraisal contingency stipulates that the sale of the home is contingent upon the property being appraised at a certain value. This contingency is important for any buyer purchasing their home using a loan as lenders want to ensure the purchase price is in line with the market value; lenders typically don’t like to loan out money for a house that costs more than it’s actually worth.
If the home is appraised at a lower value than is specified in the contract, the buyer has the option to back out of the deal. Appraisal contingencies also typically allow a seller to reduce the price to be in line with the appraised value in order for the deal to go through.
Mortgage Contingency
Also known as a financing contingency, a mortgage contingency specifies the amount of time a buyer has to secure financing to purchase the home. Like the other contingencies, a mortgage contingency is a safeguard for buyers, allowing them to back out of the deal with their earnest money if they do not secure financing in time.
Getting preapproval is a proactive step buyers can take as they begin their home buying journey to speed along the process once they find their dream home. While it isn’t guaranteed you will be approved for a loan simply because you received preapproval, it does significantly increase your chances, making the closing process that much smoother.
Sale of Prior Home Contingency
As it states, a sale of prior home contingency dictates that the purchase of the home in question is contingent upon the buyer first being able to sell their current home in a specified amount of time. If the home doesn’t sell in the allotted amount of time, either party has the option to cleanly back out.
Risks of Contingencies
While contingencies are a safeguard for both buyers and sellers in real estate transactions, they can also be risky. In a competitive housing market, many buyers opt to limit the amount of contingencies added or exclude them outright so that their offer may be accepted over others. An experienced real estate agent will be able to advise you on what contingencies to include in this situation.
The Bottom Line
Purchasing a home is a significant endeavor for most. Contingencies can provide necessary safeguards and peace of mind to buyers as they engage in this journey. While they may at times be risky, a good agent will be able to advise you as to what’s crucial and what’s not, depending on the situation.
If you have any additional questions regarding contingencies, please don’t hesitate to reach out! We’re happy to answer any questions you may have with no obligations or strings attached.
