Home Buying & Selling
November 2, 2021

What are Contingencies?

Contingencies mean that the sale of a home will happen only if certain conditions are met. This gives the buyer or seller the ability to walk away from the transactions if those conditions are not met. There are different types of contingencies, and understanding what they are can help prepare you to make an offer that works for your particular needs.

What Different Types of Contingencies are There?

When a homebuyer makes an offer, that offer will include the price they will pay for the home along with the conditions that must be met. Conditions can involve the sale of the buyer’s current home, the results of a home inspection, financing, or appraisal determination.

Home Sale Contingency

A home sale contingency means that your offer is contingent on the sale of your current home. Oftentimes, this contingency specifies a certain period like 30 to 60 days. If the home is not sold in that time frame, the contract is cancelled. Sellers typically would prefer not to accept an offer with this kind of contingency, so including this contingency in your offer may not always be the most competitive move, especially in a seller’s market when the seller has several other offers to consider.

Inspection Contingency

Another kind of contingency is an inspection contingency. This means that a buyer can walk away from their offer if an inspector finds problems with the house. Home inspectors examine the interior and exterior of a house to find any damage and they provide a report to the buyer. If the inspection reveals issues, a buyer can negotiate the sale price, request repairs, or walk away from the sale.

In seller’s markets, some buyers choose to skip the inspection altogether in order to make their offer more appealing to sellers, but this is a risky decision. There are other ways to strengthen your offer that don’t put you at risk of buying a home with damage.

Financing/Mortgage Contingency

A financing or mortgage contingency means that a buyer must obtain financing before the sale can be completed. When a buyer makes an offer on a house, they might be preapproved for a mortgage, but this doesn’t mean they have secured financing. Preapproval is not a final decision, and potential homebuyers still need to go through the approval process with a mortgage lender before they can obtain financing. A financing contingency gives the buyer the time to do this. If there are recent changes to a buyer’s financial situation like a job change or large purchases, a buyer might not be approved for a mortgage and the home would remain on the market. If a buyer does not terminate or extend the contract by the end of the specified date, they will be contractually obligated to purchase the property regardless of financing.

Appraisal Contingency

A home appraisal assesses and determines a home’s market value. An appraisal contingency allows a buyer to walk away from the sale if the home does not appraise for the amount they agreed to pay. Alternatively, a buyer could ask for a lower purchase price to meet that appraised value.

How Often Do Contingent Offers Result in No Sale?

Contingent offers are very common! The National Association of Realtors found that 76% of offers involved contingencies and only 9% of contingent and non-contingent offers were terminated. Contingencies rarely result in failed offers, and they offer valuable protection, so don’t be afraid of them.

Should I Include a Contingency?

Including a contingency in your offer is often a great idea because of the protection it can offer you against hidden damage to the house, failure to obtain financing, and other potential issues. Some people opt to waive contingencies in order to make their offer more enticing to sellers when competition is high, but this decision carries a lot of risk. To set yourself up for a better experience, be sure to get preapproved, and contact us to speak to an experienced Loan Originator who can answer all of your questions.

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