Why do contingencies matter?
Buyer’s remorse is the worst. And since a new home may be the largest purchase you ever make, buyer’s remorse on a home purchase is a next-level kind of regret. If you’re a homebuyer looking at a new property, you want to feel confident that your investment is solid and your new home is up to snuff.
That’s why contingencies exist. A contingency is a condition you put in your real estate contract. Contingencies are protective mechanisms that give you an easy way out if certain situations occur.
Contingencies are common in real estate transactions, although they tend to get “waived” more often in competitive markets.
While it may be tempting to wave contingencies to make your offer more competitive, you should always tread carefully because contingencies are one of the few mechanisms that protect you as homebuyer. “With a traditional offer, every homebuyer needs to strike a balance between ensuring appropriate contingencies to protect themselves while also putting a competitive offer on the table.
There are four common contingencies that every homebuyer needs to work through:
- Home inspection contingency
- Appraisal contingency
- Financing contingency
- Home sale contingency
Home inspection contingency
Home inspection contingencies are one of the most common home buying contingencies. Around 80% of homebuyers include a home inspection in their purchase agreement. Home inspection contingencies are one of the most common home buying contingencies; however, it is a surprise that many people waive this important contingency. “In a hectic, fast-paced, and emotionally overwhelming market, an inspection gives the buyer peace of mind and confidence in the transaction. They can waive this contingency, but that means they’re assuming more risk.”
When you include a home inspection contingency in your contract, you specify that you plan to have a certified home inspector inspect the property within a certain timeframe. As the buyer, it’s your responsibility to choose a home inspector and schedule the inspection.
If your inspector finds issues, you’ll request the seller to make repairs or lower the price of the property. Your contingency clause would specify how much time they have to respond. If the seller is unwilling to do either, then you have the choice of allowing the contingency to expire or terminating the contract and recovering your earnest money deposit.
Appraisal contingency
An appraisal contingency dictates that your purchase contract is conditional upon the property being appraised to confirm its value for your mortgage lender. Before finalizing your mortgage, your lender will want to ensure that the purchase price you pay is in line with the home’s fair market value. Lenders typically use three things to determine appraisal values:
- Comparable, recent home sales (commonly known as ‘comps’)
- Tax records
- An in-person evaluation of the property by a third-party appraiser
If the appraisal comes back in line with the purchase price of the property, the sale will move forward. But if the appraisal comes in lower than the purchase price, you should connect with your loan officer to discuss your options. You might be able to restructure your loan to make the purchase work. If you’re unable to meet your lender’s requirements, your appraisal contingency allows you to rescind your offer without losing your earnest money.
Financing contingency
A financing contingency (also sometimes called a mortgage contingency) protects you by ensuring you’ll be able to secure sufficient financing for your home purchase.
In the traditional homebuying process, most people get preapproved for a mortgage before they make an offer. You’ll include your preapproval letter within your offer to give the seller assurance that you can afford to pay for the property. But getting preapproved for a mortgage is different than having final approval, and that means that snags and delays can happen.
Your mortgage contingency is a clause that specifies that you can back out of the purchase if you’re unable to secure financing within a specific timeframe. You’ll typically include details about your loan (type, amount, maximum interest rate, and points limit) and the contingency timeframe.
If for any reason you’re unable to secure the necessary financing by the deadline, you’ll be able to cancel the transaction, recoup your earnest money, and walk away. The seller will then be free to re-list the home for other buyers.
Home sale contingency
It’s a classic dilemma: If you already own a home and you’re looking to buy a new one, do you sell your existing home first or try to buy a new one first? Figuring out the timing is tough.
You don’t want two mortgage payments. And if you’re like most Americans, a large percentage of your net worth is probably tied up in your existing home and you can’t unlock that until you sell your existing home first. This common situation is the reason home sale contingencies exist.
A home sale contingency gives you a specific amount of time to sell your existing home. If you’re unable to sell your home in that period, you’re free to withdraw your offer and recoup your earnest money deposit.
Don’t let contingencies get in the way
Contingencies are an important safety mechanism for homebuyers, but leaning on them too heavily can result in a less attractive offer. As a homebuyer, you need to make the most competitive offer possible.
