If you’re buying or selling a home, your real estate agent will build contingencies into your contract. But what are contingencies, and why will your agent use them? This guide explains what real estate contingencies are and how they protect you (and the other party) in your transaction.
What Are Contingencies in a Real Estate Purchase Contract?
Contingencies are conditions that must be met in order for a real estate purchase contract to become binding. In other words, if any of the contingencies are not satisfied, either party can back out of the deal. However, if both parties hold up their own ends of the bargain, the deal can proceed.
Related: What are discount points on a mortgage?
The 3 Most Common Contingencies in Real Estate Deals
Three of the most common contingencies in real estate purchase contracts include:
- Appraisal
- Home inspection
- Financing
Here’s a closer look at each.
The Appraisal Contingency in a Real Estate Purchase Contract
The appraisal contingency protects the buyer by ensuring that the home is worth at least the purchase price. If the appraised value comes in lower than the agreed-upon purchase price, the buyer can back out of the deal without penalty. That’s because lenders won’t allow a borrower to borrow more than the home’s appraised value.
For example, if a home is listed at $350,000 and it appraises at $340,000, the lender will only let the borrower take out a loan for $340,000. If the borrower still wants to buy the home for $350,000, that’s fine – but they have to come up with the additional $10,000 from another source. The lender will only allow them to borrow the home’s appraised value.
The Home Inspection Contingency in a Real Estate Purchase Contract
The home inspection contingency protects the buyer by giving them the opportunity to have the property inspected for any defects or problems. If the inspection turns up any issues, the buyer can then negotiate with the seller to have those items repaired or corrected – or they can back out of the deal entirely.
For example, if an inspection reveals that the home’s roof needs to be replaced, the buyer can ask the seller to either repair the roof or lower the purchase price by an amount that would cover the cost of a new roof. The buyer may also ask the seller for a credit to repair the roof. If the seller refuses, the buyer can walk away from the deal.
The Financing Contingency in a Real Estate Purchase Contract
The financing contingency protects the buyer by giving them a certain amount of time to secure financing for the purchase. If the buyer is unable to obtain financing, they can back out of the deal without penalty.
For example, if a buyer has been pre-approved for a loan but then their lender decides not to give them the loan, the buyer can back out of the deal.
Related: 5 credit-building myths you should ignore
Should You Ever Waive Contingencies?
While contingencies protect buyers and sellers in a real estate deal, there may be times when it makes sense to waive them. For example, if you’re buying a home in a hot market and you’re competing against other buyers, waiving contingencies may make your offer more attractive to the seller.
Before you waive any contingencies, be sure to consult with your real estate agent and loan officer to make sure it’s a good idea in your particular situation.
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