There can be risk associated with buying a home, so buyers and sellers alike sometimes rely on contingency clauses to protect their interests and mitigate those risks. Clauses for homebuying contingencies can be attached to an offer to purchase real estate, giving the parties the right to back out of the contract under certain circumstances that must be negotiated between the buyer and seller.
A contingency clause is a contract provision that requires a specific event or action to take place in order for the contract to be considered valid. If the party that’s required to satisfy the contingency clause is unable to do so, the other party is released from its obligations. In the realm of real estate when a house is listed as contingent, it means that an offer has been made and accepted, but before the deal is complete, some additional criteria must be met.
In the current real estate market, it is important to understand the most common type of homebuying contingencies so that you are prepared to make a competitive homebuying offer that protects your interests and entices sellers.
- Financing Contingency – Also known as a mortgage contingency, this clause says that the buyer must secure financing for the property. While a mortgage preapproval is a strong indicator that financing will be secured, a preapproval signals the start of the home buying process and does not necessarily mean that the buyer is already approved for a mortgage.
- Home Sale Contingency – This contingency states that in order to purchase the contracted property the will need to sell their existing home within a specified amount of time. If unable to secure a buyer, the party may opt to walk away from the sale with earnest money deposit still intact. In the current real estate market, sellers may opt to accept lesser offers without a home sale contingency to have more a “sure” sale of their home.
- Appraisal Contingency – An appraisal contingency protects the buyer by assuring a property is valued at a minimum, specified amount – usually the purchase price. If the property does not appraise for at least the specified amount, the contract can be terminated, and in many cases, the earnest money is refunded to the buyer.
- Inspection Contingency – Home inspections, including the general home inspection, mold inspection, and wood destroying insect inspection, allow the buyer to get a full picture of the condition of the home being purchased. An inspection contingency ensures that the buyer receives the information and can negotiate repairs, sale price, or even walk away with the earnest money if conditions cannot be met.
- Title Contingency – The title report documents the home’s history of ownership. A title contingency will stipulate that the purchase of the home not go through unless the title report shows that the home is free and clear of any liens. It also is recommended that a buyer purchase title insurance, which protects a buyer in case there is a title dispute on their property by compensating them for any loss and will cover any legal fees related to the dispute.
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