Understanding Real Estate Contingency Types

In a home sale, there are many types of contingencies that might appear in the purchase contract. These special clauses provide ways for the buyer to back out of the sale if various conditions aren’t met. All contingencies are there to protect the buyer rather than the seller, but are usually up for negotiation depending on contract terms. Here we’ll go over the most common types of contingencies so you can better understand how they’re used in various home sale situations.

Mortgage Contingency

Buyers can include a mortgage contingency in their offer for a home. If you need a mortgage and worry about delayed financing or fall through, this type of contingency can help you walk away from the transaction without penalty. This will protect you from unexpected mortgage issues and setbacks. However, getting pre-approved for a loan will help the process go smoother and give the seller more confidence that you can cover the sale price of the home.

Inspection Contingency

Home inspections happen after you make an offer on the home. A home inspection contingency clause allows the buyer to cancel the transaction if the inspection report finds serious or unexpected issues with the property. It can also give you the chance to negotiate repairs or other alternatives like lowering the sale price or seller offering to cover some closing costs. If you choose to negotiate, you can request that the seller make the needed repairs regardless of the type of issue. It’s important to note that if multiple inspections are required, like with termite or mold damage, the buyer still has to cover that expense.

Appraisal Contingency

Appraisal contingencies are like inspection contingencies. However, they happen before you actually make an offer on the home. Banks and other mortgage lenders require appraisals to determine the home’s worth. This helps them make sure they’re not lending more money than they need to. If the appraisal turns out to be lower than the purchase price, the buyers have to pay the difference regardless unless there is an appraisal contingency in the offer. This gives buyers the freedom to break the contract if there is a dramatic difference in the appraisal value of the home.

Home Sale Contingency

Home sale contingencies help protect buyers who are selling their current home while buying a new one. Sometimes, a buyer might not need a loan but needs the money from their home sale in order to make the new home purchase. This leaves a very specific period of time for everything to process and any delays in selling the home will mean delays in buying as well. Adding a home sale contingency allows you to back out of the deal and keep your deposit if this happens.

These are the four contingencies often included in purchase contracts. All of them are ways of protecting the buyer from unexpected delays or other issues that require their need to back out of a transaction. The price of a home is no small number and neither are the deposits. Therefore, it’s a good idea for buyers to consider all the outcomes of their situation and request whatever contingencies they feel are necessary.