What Is a Contract Contingency When Buying a Home?
A contingent offer means that an offer on a property has been made and the seller has accepted it, but that the final sale is contingent upon certain criteria that have to be met. These criteria, or contingencies, are clauses in a sales contract that typically fall under three major categories: appraisal, home inspection, and mortgage approval.
Such contingencies are mainly put in place so that buyers can back out of a real estate sale if something goes wrong, usually without losing their earnest money deposit. A seller might entertain other offers after a refusal, but won’t deal with another buyer until the contingent offer is settled in one way or another.
Home inspection contingency
A home inspection contingency could well be the most important one for home buyers. This contingency gives buyers the right to have property professionally inspected after putting down earnest money. And finalizing the real estate transaction usually hinges on this contingency. If something is wrong, a home inspection contingency allows the buyer to request repairs or renegotiate the purchase price and/or request a credit at closing—or back out of the sale all together. It’s rarely advisable to waive an inspection contingency, and home buyers should generally consider this a must-have clause in a sales contract. If something is wrong with the current home on the real estate market, you'll want to know about it and a good inspection will find it. Once you know the problems, you can talk with the sellers about what they need to fix before you buy the home.
With this real estate contingency, a third party hired by the mortgage lender evaluates the fair-market value of the current home for sale. In the event that the appraised value proves to be less than the sale price, the appraisal contingency lets you back out of the deal.
In hot markets, eager buyers might feel pressured to waive a contingency, but they could end up paying more. However, the lender will only put up a certain amount of money for the appraised cost—which may not be the asking price—and the buyer will have to cover the rest.
For example, let’s say you have a fixed-rate loan that covers 90% and you need to put 10% down for a home selling for $500,000. If the property is appraised at $475,000, the lender is only going to cover 90 percent of that appraised value, or $427,500. In this case, instead of a $50,000 down payment, you would be expected to put down $72,500 to cover the difference. Waiving this contingency in the purchase contract can be a gamble.
You don’t want to sign a property sale without having the money to back it up. A mortgage contingency is a contingency that protects the buyer and seller from getting into a real estate sale without a proper loan. Under this contingency, the buyer has a specified period of time to obtain a loan that will cover the mortgage after the offer is accepted. If the buyer can’t get a lender to commit to a loan, the buyer has the right to walk away from the sale with the down payment.
To expedite the process, try get pre-approved rather than just per-qualified. If you’re pre-approved, you won’t be wasting the seller’s time or yours during the loan-hunting period, which could be drawn out for many different reasons..
Like an appraisal contingency, eager buyers and sellers in hot real estate markets might want to waive this contingency for the current home for sale, especially if cash is on the table. But waiving this contingency means that if your mortgage lender delays or denies your loan after a seller accepts your offer, you can lose the deposit during escrow, so it’s a risky venture.
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