What Are the Most Common Contingencies?

Written by Ashley Sutphin Posted On Wednesday, 28 April 2021 00:00

When you’re buying a home, there’s something called a contingency to be aware of. A contingency clause means that certain requirements must be met for the contract to be binding. If the terms of the contingency aren’t met, then the contract might end.

Sometimes these are described as if-then scenarios. For example, if you sell your home, then you’ll buy someone else’s.

When you find a home you want to buy, it usually starts with a purchase offer that you make to the seller. When the seller eventually accepts your offer, the contingencies may be attached to that offer. Contingencies are included in your real estate contract. 

The following are some of the most common contingencies.

Selling Your Current Home

One common contingency is that your offer might be based on whether or not you successfully sell your current home.

This is called a chain of sale clause.

These clauses are usually based on a certain time frame, which might be 30 or 60 days. Then, after that time, if your home doesn’t sell, your contract ends.

If you’re buying a home in a down market, then this might be more feasible. If you’re trying to buy a house in a hot or competitive market, this is going to make it hard for you compared to other buyers.

Appraisals

An appraisal contingency is a protection for you as a buyer. It’s meant as a way to make sure the property is valued at a specific, minimum amount. If the property you want to buy doesn’t appraise for at least what’s specified, you can terminate the contract. In many cases, you can also get your earnest money back.

Inspections

It’s always recommended that you have a professional inspector check out a property before you buy it. The appraisal is different from this. An appraisal is a value that’s for the lender and is required for underwriting. An appraisal doesn’t look at the physical condition of a home as much as factors that play a specific role in its value.

An inspector is going to go over things like mechanical systems and structural elements of a home and identify anything that needs to be replaced or perhaps repaired.

You might use these as part of your negotiations.

Contracts might stipulate that the repairs be made by the seller if they’re found, or again, you could renegotiate based on what an inspector finds.

If you’re looking for a home in a hot market, you might agree not to have an inspection at all.

Financing

With a financing contingency, also sometimes called a mortgage contingency, you have the time to obtain the financing you’ll need to purchase a home. If you can’t get financing, then this leaves you the ability to get out of your contract and still get your earnest money.

With a financial contingency, usually, the contract will outline a certain number of days that you as a buyer have to get financing. Then, you have up to that date to terminate or extend your contract.

Otherwise, the contingency is considered automatically waived, and you have to buy the property even without a loan.

What’s important to realize is that yes, if you’re buying a home, contingencies can be an important way to protect yourself. At the same time, you need to be smart in how you use them because too many contingencies can cause your offer to be rejected. If you’re buying in a competitive market, sellers aren’t going to want to deal with a laundry list of contingencies. Even if you can’t raise your offer in a multiple offer situation, what you can do is eliminate contingencies to make yourself a more attractive buyer.

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