Buying your dream home can create a lot of stress. For most people, it is the biggest purchase they will ever make. Fortunately, there are safeguards in place that can protect you as you move through the home buying process.
If you are buying or selling your home for the first time, you will hear quite a bit of new lingo along the way. One real estate term you may come across is “contingency.” As a buyer in the housing market, you want to protect yourself against the unexpected since the purchase is so large and it involves so many parties. That is why most home sales are made “contingent” on what happens next, which allows buyers to back out if something goes wrong as the sale moves through the process on the way to completion.
What is Contingency?
Contingencies are a great option for buyers who want to go forward with their purchase but need some assurance that the deal will work. “Contingent” in any sense means “depending on certain circumstances” and that certain conditions need to be met before the contract becomes valid. Contingencies can be as simple or complicated depending on what type and when you buy.
In real estate, when a house is listed as contingent, it means that an offer has been made and accepted, but some additional criteria must be met before the deal is complete. If those contingencies are not met, the contract is void. Contingencies are often used to protect the buyer from problematic home listings or unforeseen issues within the real estate transaction.
What Are Common Contingencies In Real Estate?
Most sellers prefer that the offer comes with no contingencies. The buyer, of course, wants to make an offer that protects them by including contingencies because they will lose the earnest money they paid in the event they need to back out of the deal due to issues with the home or contract.
Adding contingencies can be risky, especially in a “hot” market where many offers are coming in for the same property. Other prospective buyers might make an offer without a contingency, making their offer look more appealing than yours and more likely to be chosen by the seller.
There are five types of contingencies most often used within real estate contracts, including:
- Home Inspection Contingency
The home inspection contingency requires that a home inspector assess the condition of the home, especially aspects that might not be obviously visible. If the inspection reveals serious flaws in the home’s condition, the buyer has the option to back out, or the buyer and seller may negotiate over who will pay for it to be fixed. If the home’s inspection report does not reveal anything the buyer was not already aware or does not find any structural/hazardous issues, then the offer will go through as planned.
Keep in mind that just because you have a home inspection contingency, you do not have to walk away from the deal just because there is an issue revealed with the house. The buyer and the seller might agree on how to cover the repairs and resolve them.
- Appraisal Contingency
The appraisal contingency comes into play most often when the buyer is taking out a mortgage. Appraisal Contingency means that the offer goes through if and only when a lender approves your appraisal after assessing an assessment of the home’s value based on comparable houses in their area. Lenders almost always require an appraisal, which is a third-party look at what the home is actually worth.
Just because both parties agree on a sale price, the lender cannot offer you a mortgage that is larger than what the home is appraised for. Meeting that appraisal number can often be an issue, but if the buyer has the cash to pay more upfront to make up the difference between the amount of the mortgage loan and the agreed-upon purchase price, or you can renegotiate, the deal might still be able to go through.
- Mortgage Contingency
A mortgage contingency gives the buyer a specific period of time to secure financing. After the home buyer has applied for a mortgage, they are waiting to find out if it was approved. This condition is known as a financing contingency and usually occurs because of some lender requirements that need meeting before giving approval on funding your loan.
The good news is that this is a financing contingency that can be mostly handled by doing some due diligence. First, you want to ensure that you have been pre-approved for a mortgage as a buyer, not just pre-qualified. The pre-approval puts you far closer to actually getting the mortgage as it entails relatively lengthy paperwork upfront to make sure your finances are in order.
- Home Sale Contingency
This contingency is related to the buyer’s financial situation and notes that the sale will only go through if your current home sells first. While this can protect the buyer, it is common for sellers to reject this type of contingency in a seller’s market, as the seller knows there may well be another buyer who does not have this restriction. Remember that some sellers might reject your offer because of this if they want to close the sale quickly, but it might be attractive to other sellers shopping for a new home themselves.
- Title Contingency
Title contingencies are a great way to protect the buyer from getting stuck with an unwanted property. If it turns out there are unresolved legal or financial issues with the title, they can pull their offer and walk away without paying anything more than what was paid just for looking at houses in that area.
Any claims against the title can make a purchase risky for buyers. The good news is that title searches should reveal those problems before closing. And even if there is an issue that you are able to clean up, it is wise to get title insurance, which protects against future claims.
Can Real Estate Contingencies Be Avoided?
Buying a home is typically the biggest purchase someone will ever make, and contingencies help buyers ensure that their investment is secure. However, if you are a buyer looking to make a competitive offer, contingencies could hold you back. That is because sellers usually prefer contingent-free bids that give them more certainty. Some buyers in hot markets choose to waive contingencies in their bid, but most people cannot afford to take this risk.
For sellers, a contingent contract means that there is always a chance that the sale could fall through, in which case the seller would have to go through the whole selling process again. Contingencies can also mean time-consuming appraisals, inspections and other demands which could cause delays in the closing process.
What’s The Difference Between Contingent and Pending?
Contingent and pending are two terms that are often confused, but that indicate different parts of the sales cycle.
In the contingent sale, the seller has accepted an offer, but everyone is still working through the issues. The real estate contact might have a financing contingency for the buyer to procure financing from a mortgage lender. A listing agent may feel confident enough that the prospective buyers will have no problem satisfying the mortgage contingency.
Once you are in the pending stage, you are almost there. Most sellers will not continue to show the home while the sale is pending, as they are contractually precluded from accepting offers.
Final Thoughts
Understanding contingencies is a key component of buying a house. Make sure you understand contract timelines, financing, and everything else it takes to have a successful home purchase.
When choosing an escrow company there can be many important factors to evaluate. Fees, location, staff and even recommendations from friends and colleagues are all things to consider. With Citrus Heritage Escrow by your side, you can rest assured that when you receive your settlement check, you’ve gained the maximum benefit from your home sale or purchase.
Call us today with any questions or concerns. Our professional Escrow Agents will help you through this exciting yet confusing process. (951) 335-7200