Buying a home is a significant purchase, and, understandably, most people will hesitate or feel scared to make an offer to buy a house. It is common to find buyers who add contingencies to the contract as a safety net. 

It is vital for homebuyers, sellers, and real estate professionals to understand a contingency to a home sale contract and how it may affect a real estate transaction. This blog article will define what a contingency is and explore the different types of contingencies commonly found in a contract. 

Contingency: Defined

A contingency pertains to a specific requirement or condition in a real estate contract that must be fulfilled for it to become legally enforceable. Although most sellers do not want contingencies when buyers make an offer to buy a home, these measures can provide an exit point for both seller and buyer to withdraw from the contract. 

A real estate contract may provide for different contingencies. The common ones are appraisal, loan, inspection, and home sale contingencies. 

Appraisal Contingency

This contingency guarantees that the property appraisal is in accordance with your purchase price. The appraisal specifies the fair market value of the house you want to buy. If your offer to purchase the home is higher than the appraisal, it is a problem. However,  with an appraisal contingency, you can back out of the deal and get your initial deposit. 

The seller can decrease the home price if the appraisal comes out low. You can also ask the seller to lower the price for the deal to continue. Since lenders will not approve your loan application if the property appraisal turns out lower than expected, an appraisal contingency can provide leverage to you as a buyer. 

Without an appraisal contingency in the contract, you cannot walk away from the deal even if the home appraisal is low. You will need to continue with the contract while knowing that your purchase price is higher than the property’s fair market value. 

Loan Contingency

This contingency means that the contract is legally binding if the buyer gets financing for his home purchase. Typically, the lender will give pre-approval to a buyer to start their home search, which means the lender has already checked the qualifications of the buyer for the loan. However, problems during the underwriting process may happen in finalizing the loan.

The advantage of having a loan contingency is that you can withdraw from the contract and get your earnest money deposit back if you fail to acquire a loan on or before a specified date. The period usually allowed to finalize the loan is 30 to 60 days. 

The buyer is not the only one who can benefit from this contingency. The seller can also revoke the agreement if the buyer does not get approved for a loan by a specific date. He can place the property back on the market and look for a new buyer. 

Home Inspection Contingency

It is common to see a home inspection contingency in a home sale agreement. It is estimated by the National Association of Realtors that around 80% of homebuyers incorporate this type of contingency in their contract.

This contingency allows the buyer to inspect the house with the help of a professional inspector to see if the property has any issues. The inspection will cover the interior and exterior structures and the systems inside the house. 

Once the inspection unveils any issues with the property, the buyer can invoke the inspection contingency clause to walk out of the contract. Or, the buyer can talk with the seller to fix the problems before closing the home sale. Therefore, it is vital to include an inspection contingency in the contract to ensure you are not buying a defective home. 

Home Sale Contingency

A home sale contingency can be included in the contract if the buyer is trying to sell his old house before buying a new property. The buyer must ensure first that he can close on the old property and use the sale's proceeds to purchase a new home. 

It is crucial for the sellers to consider if the home is already placed on the market or under a contract before accepting this contingency. There must be a specified date in the contingency clause where the seller can withdraw from the agreement if the buyer does not sell his house on the said date. 

Endnote

So, those are the four contingencies commonly found in a home sale agreement. These contingencies can benefit either the buyer or the seller. You can broach them when you talk with the other party if you have an interest in purchasing a property. Work with a real estate attorney to ensure that you legally conduct such business.