Contingencies Buyers Need to Know
These are the most common contingencies you need to know as a buyer.
Contingencies are a crucial thing to be aware of when buying a home. A contingency clause means certain requirements must be met for the contract to be binding. If the terms of the contingency aren’t met, 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, the transaction usually starts with a purchase offer you present to the seller, and contingencies may be included in the contract. The following are the most common contingencies you need to know:
1. Home sale contingency. In other words, your offer is based on whether or not you can successfully sell your existing home. This clause is usually based on a time frame (e.g., 30 to 60 days) in which you have to sell. If your home doesn’t go under contract within that time frame, the contract ends. If you’re buying a home in a down market, this clause might be more feasible. If you’re buying in a hot market, this clause will make it harder for you compared to other buyers.
2. Appraisal contingency. This contingency protects you as the buyer. It’s meant to ensure the property is valued at a specific minimum amount. If the property you want to buy doesn’t appraise at the purchase price, in many cases you can terminate the contract. You can also usually get your earnest money deposit back.
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3. Inspection contingency. It’s always recommended that you have a professional inspector check out the home you want to buy before you buy it. An inspection is different from an appraisal in that it looks at the physical condition of the home. An appraisal is a value that’s required for underwriting purposes, and an appraiser will only examine the factors that determine that value. If you’re buying a home in a hot market, you might agree not to have an inspection at all just to make your offer more competitive.
4. Financing contingency. Also known as a mortgage contingency, this gives you the time you need to obtain financing to purchase the home. If you can’t get financing, you can get out of the contract and still get your earnest money deposit back. This contingency typically outlines how many days you have to obtain financing. If you run into challenges doing so, you can always try extending the contract. Otherwise, the contingency is considered automatically waived, and you have to buy the property without a loan.
While contingencies are an important way to protect yourself when buying a home, you need to be smart about how you use them. Including too many contingencies in your offer can lead to it being rejected. If you’re buying in a competitive market, sellers won’t want to deal with a laundry list of contingencies. Even if you can’t raise your offer price in a multiple-offer situation, you can reduce your contingencies to make yourself more attractive as a buyer.
As always, if you have questions about this or any real estate topic, don’t hesitate to reach out to us. We’re happy to help.
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