What is a contingency in real estate?
The phrase “contingency” is a pretty common one in the real estate world.
Essentially, it’s a clause in a sales contract — a condition that must be met before the deal goes through. If that condition isn’t met by a certain deadline, you can back out of the transaction unscathed (i.e., without losing your deposit).
Not too long ago, real estate contingencies weren’t so common. Sellers had a lot of leverage. In order to stand out from the pack, buyers had to waive many contingencies just to land a deal.
Now, the tables have turned. As mortgage expert Ivan Simental recently explained on The Mortgage Reports Podcast, “Now, it’s in more of a favor of the buyer.”
This is a good thing, Simental says, as it provides more protection for buyers and ensures they’re making a smart deal.
Are you considering buying a home in today’s market? Simental recommends including real estate contingencies in your offers — specifically these three.
Listen to Ivan on The Mortgage Reports Podcast!
1. Home inspection contingency
A home inspection contingency gives you a certain amount of time — typically 10 to 15 days — in which to have your home inspected for deficiencies. You’ll hire a third-party certified home inspector. They evaluate the property and give you a final home inspection report detailing any issues.
“This time period is when you get to see what is really wrong with the property,” Simental says. “What issues does the property have? Are there going to be any repairs needed?”
If repairs are necessary, you can negotiate for the seller to facilitate them before closing or, if they’d rather not, include closing credits so that you can pay for the repairs yourself after move-in.
2. Financing contingency
A financing real estate contingency, also known as a mortgage contingency, is a clause that allows you to cancel the home purchase contract if you’re unable to secure a mortgage within a specific timeframe.
If your mortgage doesn’t get approved or there’s another issue with your financing, you’re able to pull out of the deal without penalty and receive a refund of the earnest money you put down.
“Sometimes a lender makes a mistake, and your loan gets denied,” Simental says. “If there is no financing contingency, you lose your earnest money deposit, and you don’t get that back.”
3. Appraisal contingency
Another important real estate contingency is the appraisal contingency. It informs your lender whether the purchase price you pay is in line with the home’s fair market value. If the home’s appraised value comes in under what you’ve offered for it, you can pull out of the deal.
This is pretty critical because, without the appraisal contingency, you could be on the hook for quite a bit of cash.
For example, if your sales contract has you offering $500,000, but the home’s appraisal comes in at $450,000, your lender’s not going to give you that full $500,000. Instead, you’d need to make up the difference ($50,000) out of pocket (or back out and lose your earnest money).
“Luckily, right now, I’ve been seeing values coming in a little bit higher, because sellers are knocking the sales price down a little bit,” Simental says. “Still, the appraisal contingency is an important one because it protects you from overpaying.”
The Bottom Line
Whether you’re a first-time home buyer or a repeat one, navigating the purchase of a home can be intimidating. However, with the right real estate contingency clause in the contract, both you and the seller will stay protected.
Just remember that adding too many real estate contingencies in your contract could make your offer less appealing to a seller, especially if multiple bids are involved. If you’re in the market to buy a home, reach out to a local lender or real estate professional to begin your path to homeownership.