Most Common Homebuyer Contingencies in Purchase Contracts

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Aug 13, 2022

When you’ve found your dream home and secured a winning offer, the last thing you want is for the deal to fall through. At the same time, you also want to be sure of what you are getting into when making the home purchase. You want to ensure the home is free of major issues, is properly appraised, and the title is clear. You may also need to make sure your finances are in check or your previous home is sold before committing to purchasing your new home.

Luckily, contingency clauses can help with just that. Contingency clauses are conditions that are placed within a purchasing contract that must be dealt with before the deal is finalized. These various contingencies help to provide both parties (buyer and seller) back out of a contract if the specific contingency conditions are not met within a set period of time.

Contingencies can definitely slow down process and put homebuyers at a bit of a disadvantage. Buyers should be especially cautious of using contingencies if they are in a bidding war against competing buyers. However, that doesn’t mean that these homebuyer contingencies shouldn’t be used. In fact, most are actually often in the buyers best interest and will definitely pay off in the long run.

To get a better understanding, here are some common homebuyer contingencies in purchasing contracts and the situations in which they are used.

Home Inspection Contingency

Home inspection contingencies allow the buyer to back out of the sale of a home if the home inspection reveals any significant issues with the property. These issues could include roof leaks, structural defects, or a faulty electrical system. With this type of contingency, it is the buyer’s responsibility to arrange for the home to be professionally inspected. This is typically done within a week or so of signing the contract. If major issues are found, the homebuyer can either choose to negotiate repairs with the seller, or back out of the sale completely if the seller does not comply with their requests.

Appraisal Contingency

Appraisal contingencies protect both the buyer and mortgage lender when the value of the home the buyer intends to purchase doesn’t line up with the agreed upon offer price. Mortgage lenders don’t like to loan out money to borrowers for a house that costs more than it is actually worth. An appraisal contingency allows the buyer to exit the contract to avoid overpaying for a home. For the seller, a low appraisal combined with an appraisal contingency means that they will either have to renegotiate the price or find a buyer who will agree to the sale price despite the low appraisal value.

Financing Contingency

The pre-approval that a traditional mortgage lender provides doesn’t guarantee that financing will come through during the final underwriting process. That is where the financial contingency comes in to play. Also referred to as a mortgage contingency, a financial contingency gives the buyer a period of time to secure the needed mortgage to finance the home they intend to buy. If the buyer does not end up securing the financing within the allotted time period, the buyer can back out of the sale and the seller can put their home back on the market.

Home Sale Contingency

In many cases, a homebuyer needs to sell their current home before they can afford to buy a new home. There are two types of home sale contingencies. A sale and settlement contingency is used when the buyer has not yet received an offer or signed a contract on their current home. Under the home sale contingency, the seller can use the kick-out clause which allows them to keep their home on the market and review other offers, potentially “kicking out” the original buyer if  a better offer comes along. A settlement contingency is used when the buyer’s home is already under contract, but they just need to complete the closing on it. In this situation, the kick out clause cannot be used and the seller must remove their home from the market.

Title Contingency

A “title” refers to the legal right to ownership of a property. Everytime a property is bought or sold, the title changes hands. Before purchasing a home, a title search is performed to make sure the buyer is receiving a title that is clear of defects such as liens or zoning violations. These defects could potentially hinder the transfer of the deed or put unwanted responsibility on the new homebuyer. A title contingency ensures that the buyer can back out of the contract if the title search throws ownership of the property into question.

Conclusion

To avoid potential risks with contingency offers and knowing which ones can be waived, you should consider working with a real estate agent who knows how the different contingencies work. Our team at SimpleShowing is here to help you put the right homebuyer contingencies in place to protect you in your new home purchase. Contact us today!

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