Real Estate Contingencies Buyers Need to Know

When you are buying a home or condo for the first time, it is essential to have some understanding of the process. Once you search for a property, you'll eventually find the "one."

If you're lucky, you'll write an offer and put the home under contract. Before that happens, it is crucial to understand what to expect will become part of the contract.

The real estate contingencies make up the most vital aspects of any contract between a buyer and seller. In hot seller markets, it is not unusual to expect fewer contingencies.

On the other hand, a buyer's market will lead to more real estate contingencies. When buyers and sellers agree to terms, the multiple Listing Service (MLS) listing status will change from current to "contingent."

It leads many consumers to ask what contingent real estate means. It means a contract has been executed, and the ball is now in the buyer's court.

The buyer will now move forward to satisfy their requested contingencies in the contract. Let's examine four possible contingencies buyers and sellers can expect to see.

What Are Common Real Estate Contingencies?

The contingencies most often found in real estate contracts are as follows:

• Mortgage Financing
• Home inspection
• Appraisal contingency
• Home sale contingency

What is a Mortgage Contingency?

A mortgage contingency is a clause in a real estate contract that allows the buyer to back out of the contract if they cannot obtain financing for the home.

This contingency gives the buyer a specified amount of time to secure financing and protects them from purchasing the home without a loan.

The mortgage contingency clause will state the amount the buyer wishes to finance.

The clause allows the buyer to back out of a contract without any penalties if they cannot secure the financing they need.

The typical time frame for a mortgage lender to provide a loan to a borrower is three to six weeks. A few factors can influence the time needed, including the local real estate market sales volume, the lender, and the amount of refinancing taking place at the time.

The time to close on a house is usually 45-60 days.

When a buyer cannot procure financing in the agreed-upon time, they must either ask for an extension or terminate the sale.

If a buyer fails to notify the seller in writing before the mortgage contingency expires, they cannot get financing, the earnest money deposit could be forfeited.

Home Inspection Contingency

A home inspection contingency is a common clause in a real estate contract that allows buyers to back out if they are unhappy with the inspection results. The clause protects the buyer from purchasing a home without knowing the property's condition.

The home inspection contingency clause will state when the buyer has to complete the process and make decisions based on the findings. The due diligence period can typically range between one to two weeks.

During this time, the buyer is also responsible for researching anything about the home's history or the surrounding area which may concern them.

The buyer is responsible for hiring a qualified home inspector to inspect the home. The inspector will look for signs of damage, mold, pest infestations, and other issues that could affect the home's value. Based on the findings, the buyer can decide whether to move forward.

If the buyer is unhappy with the home inspection results, they must notify the seller in writing before the contingency expires. If the buyer fails to do so, the earnest money deposit could be forfeited.

The home inspection is vital to determine whether or not the buyer is purchasing a lemon or a property they will enjoy for years to come.

What is an Appraisal Contingency?

An appraisal contingency is a clause that allows the buyer to back out of the contract if the home's appraised value does not meet the sales price.

This clause protects the buyer from overpaying for a property and ensures the loan is lower than the appraised value.

The appraisal contingency clause will state when the buyer has to complete the appraisal and make decisions based on the findings.

When there is no contingency clause, the lender could deny the mortgage financing if the appraised value is lower than the purchase price.

The time frame for completion of a real estate appraisal is usually a few weeks after both parties have executed the contract. The appraiser will report back to the lender with their findings.

When the contract price exceeds the appraised value, a buyer may need to increase their down payment amount to satisfy the lender. Another option would be for the buyer to ask the seller to meet the appraised value.

When buyers have a significant down payment of over twenty-five percent, it is possible the lender will accept a lower appraisal.

If the buyer does not wish to proceed due to a lower value, they must follow the contingency date to ensure they can get their earnest money refunded.

The appraisal contingency is a vital clause in a real estate contract to protect the buyer from purchasing a home for more than its market value.

What is a Home Sale Contingency Clause?

A home sale contingency clause is far less common. It protects the buyer from purchasing a home before selling their current one. The clause allows the buyer to back out of the contract if their current home does not sell in an agreed-upon time frame.

The home sale contingency clause will state when the buyer has to complete the sale of their home and make decisions based on the findings. The due diligence period can typically range between one to three months. During this time, the buyer must put their current home on the market and work to secure a buyer.

If the buyer cannot secure a buyer in the specified time frame, the seller must be notified in writing before the contingency expires. If the buyer fails to do so, the earnest money deposit could be lost.

Most sellers do not accept home sale contingencies as they are unattractive.

Final Thoughts on Contingencies

Whether you are buying or selling, having a handle on the common contingencies found in real estate contracts and how they work is essential.

Ask your agent or real estate attorney for clarification if you are unsure.