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Buying a house can be exciting and overwhelming. When you sign a contract, it’s for hundreds of thousands of dollars. You need everything to fall into place for the transaction to take place.
Unfortunately, that doesn’t always happen, which is when real estate contingencies are important.
Most buyers have at least one contingency in their offer. Here’s what they are and how they affect you when buying a house.
What Are Contingencies When Buying a Home?
When you sign a sales contract to buy a home, you sign a legal document. If you back out of the sale, you could lose your earnest money deposit, which could be 1% – 3% of the sales price. That’s $1,000 – $3,000 for every $100,000 in sales prices.
If things don’t go your way, a contingency gives you a ‘way out’ of the contract. For example, the house has major mold issues, or you can’t get financing.
You wouldn’t want to buy a home that has major issues that will cost an arm and a leg, and you can’t buy a house if you don’t have financing.
Without contingencies, though, you’d still be on the hook to settle the contract, in most cases. Contingencies help you back out of the contract if necessary.
While you don’t want a contract filled with contingencies (most sellers won’t accept the offer), you should protect yourself. Here’s what you should know.
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How Does a Contingent Offer Work?
A contingent offer gives you time to work out the ‘bugs’ before settling into the contract. Contingencies don’t last forever – they always have an expiration date that’s fair to you and the seller.
Sellers don’t have to accept contingent offers either. In a seller’s market, where there are many offers, you may want to limit your contingencies since sellers can be picky about the offer they accept.
If you have a contingent offer, you have until the contingency expires (usually a couple of weeks) to back out of the contract IF it’s for a reason stated in the contingency.
Different Types of Real Estate Contingencies to Know
Home Inspection Contingency
The home inspection contingencyis the most common. This gives you time to hire an inspector, for the inspector to inspect the house, and you time to review the report.
If the inspection shows the home has major issues that you and your real estate agent didn’t see, you could back out of the sale without losing your earnest money deposit.
You could also ask the seller to fix the issues, lower the sales price, or give you credit at the closing to cover the cost.
The appraisal contingency protects you should the appraiser come up with a fair market value for the home lower than the amount you offered.
Most lenders won’t approve your loan if the appraised value is lower than the sales price. If they do, they’ll use the appraised value versus the sales price.
This means you’d have to make up the difference between the sales price and the appraised value in cash plus the down paymentyou already committed to paying.
If the appraised value comes in low and within the contingency dates, you can back out of the contract without losing money.
You can also bargain with the seller, asking them to lower the sales price to meet the appraised value.
>> More: What Is a Home Appraisal?
The mortgage contingencygives you time to secure financing without conditions. Even if you’re pre-approved, things come up during mortgage approval.
The mortgage contingency buys you more time so you can clear up any conditions and/or find financing.
This is a good idea when you aren’t sure if you’ll get approved for a mortgage or if the pre-approval is contingent upon major conditions you aren’t sure you can satisfy.
If you can’t secure financing before the contingency expires, you can back out of the contract.
Home Sale Contingency
If you own a home and need to sell it to pay for the new home, you need everything to work out perfectly.
Unfortunately, life doesn’t work that way. If you’re having trouble selling your home, you may not be able to buy a new home.
A home sale contingencygives you a little time to secure a contract on your home and to be sure it will close before you commit to buying the new house.
If you’re worried about a home’s title – whether you think the house may have liens or the ownership seems a little ‘off,’ you can ask for a title contingency.
This gives you and the title company time to perform a title search and ensure the home is free and clear of any liens except the current owner’s mortgage.
If the title doesn’t come back ‘clear,’ you can back out of the contract before the contingency expires.
Do Contingencies Have Deadlines?
Yes, contingencies always have deadlines. It’s important to keep track of them, especially if you have multiple contingencies.
If you miss the deadline and back out of the contract, your earnest moneydeposit is on the line.
What’s the Difference Between Contingent and Pending?
Contingent and pending sound similar, but in the real estate world, they have two different meanings.
A contingent sale is a sale contingent on certain conditions, such as a home sale or clear mortgage approval. The sale is truly a sale until the contingencies expire and/or are resolved.
A pending sale means all contingencies are satisfied. You and the seller are just waiting for the paperwork to be completed.
Pending sales typically go through unless there are issues at the last minute.
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What Does It Mean When a Property is Contingent?
If you come across properties that are listed by contingent, it means there is an offer on the home, but it’s contingent on certain conditions.
Some sellers require a contingent offer with a kick-out clause. This allows them to accept another ‘better’ offer if it comes along, kicking out the first offer.
Other sellers accept a contingency with no kick-out clause, which means they can’t accept other offers unless you don’t clear your contingency.
Active vs. Passive Contingencies
- Active Contingencies: Active contingencies remain active until the buyer cancels them. This doesn’t mean it doesn’t expire, but even when it does, the contingency remains. The seller can let the contingency stand or ask the buyer to act on it, either backing out of the contract or removing the contingency.
- Passive Contingencies: Passive contingencies automatically fall off the contract when it expires. For example, if you have a home sale contingency for 14 days on the 15th day, it’s no longer a part of the contract.
Why Are Contingencies Important?
Contingencies protect buyers from losing their earnest money deposit.
Since you sign a legal contract, you are on the hook to buy the property and follow through on the transaction no matter what happens.
If you have a contingency, you have a way out of the contract without losing your earnest money deposit if you act within the timeframe.
Bottom Line: Types of Contingencies in Real Estate
Contingencies are something to discuss with your real estate agent and/or attorney. Some sellers won’t accept any, and others are more open to the idea.
Choosing the contingencies you really need is important, so you protect yourself without going overboard and forcing sellers to decline your offer.