Common Home Buying Contingencies Explained
At some point in the home buying process, you’ll be ready to
make an offer. This offer you make will include both your offering price and a
set of legal clauses called contingencies.
Price alone does not determine how appealing or unappealing an offer is. These
contingencies you include will be just as important. The dropping of one or
more can make the difference between your deal being accepted or the seller
going with someone else. Contingencies come in a number of different forms and
will indicate certain things that will need to happen in order for the sale to
move forward. Their purpose is to protect the buyer in case something goes
wrong and they have to exit the deal. Below are the five most common.
Inspection Contingency
Of all the contingencies, the inspection
contingency is the one most people are familiar with. It’s there to
protect the buyer and allow them to get the full picture of the home they
intend to purchase. One or more professionals will be brought in to inspect
various parts of the property. Once the buyer has these reports, they’ll be able
to negotiate with the seller on repairs or remediations if needed.
If no agreement can be reached, then the buyer is free to walk away from the
deal.
When buying a co-op or condo apartment the inspection
contingency is usually not needed. The common areas, walls and roof will be the
responsibility of the building to maintain. With so many apartments in each
building this maintenance charge is usually inconsequential. However, it’s
always better to include it if you have any doubts or are buying a resale.
Financing Contingency
Those buyers who
need financing to complete a home purchase will want a
financing/mortgage contingency. This clause allows buyers to back out of a deal
if they are unable to secure financing for the purchase. Many first-time buyers
make the mistake of thinking that just because they’ve received mortgage
pre-approval then their loan is a sure thing. This is far from the case as
there is still the underwriting process to go through which will take a closer
look at their finances. If they fail to meet the requirements or something
unexpected comes up like losing their job, then the lender reserve the right to
reject the loan application. The financing contingency gives buyers a safety
net to get out and still be refunded their down payment.
Appraisal Contingency
With a loan comes the need for a home
appraisal. The lender needs assurance that the property being
purchased is actually worth the amount the buyer has agreed to pay. If the
appraisal comes back saying that the market value of the property is less than
the sales price, then the contract can be terminated. Some appraisal
contingencies allow the buyer a certain window of opportunity to fix the
problem and move forward. They must either make up the difference or negotiate
with the seller for a reduction in the sales price. But if neither of these can
be done then the contingency allows them to back out of the deal without
penalty.
Title Contingency
The title is a legal document which shows the record of its
homeownership, both past, and present. It will also show a record of any liens,
judgments or other issues. When going through the home buying process, a title
company or your attorney will review the title before closing to see if there
are any issues. Some issues can be resolved before the closing day. However, if
something cannot be resolved then this contingency comes into effect. This way
the buyer can exit the deal rather than take on a property with contested
ownership or having to pay off someone else’s debts.
Home Sale Contingency
It sometimes happens that a buyer has to sell their current
home to raise the funds needed for a new home purchase. The home sale
contingency allows them a specified amount of time to find a buyer. If they are
unable to then the clause allows them to exit the deal and get their deposit
back. Obviously, this contingency is not favored by sellers as they’ll have to
take their home off the market with little assurance that the buyer will
actually purchase it. It’s usually taken as a last resort when no other buyer
can be found. In competitive markets, with limited inventory, this contingency
can actively work against a buyer.
Final Thoughts
There are numerous other contingencies, but these are the
most common types to encounter. What sellers need to keep in mind is that
contingencies can be something of a double-edged sword. They protect you and
allow a legal way out if something unexpected comes up. but they also make your
offer look less appealing to the seller. Those like the home inspection and
financing contingencies are par of the course in most deals and few sellers
will object to them. But as you move away from these the less appealing you make
your offer look. Your guide in deciding what contingencies to include should be
the current market.
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