Real estate contingencies are one of the many concepts you’ll encounter in the steps to buying a house. Contingencies protect both homebuyers and sellers during negotiations and often depend on local real estate market conditions.
As a homebuyer, you’ll need to balance necessary legal protections with submitting an offer that appeals to the home seller. While it may seem safest to load your agreement with contingencies, doing so can make your offer less attractive, especially in a strong seller's market.
What Is a Real Estate Contingency?
A real estate contingency is a condition written into the purchase agreement that must be met for the sale to move forward. Simply put, if the condition isn't satisfied, either party may have the option to cancel the contract. For example, the sale might depend on the results of a home inspection and how the seller remedies any problems discovered.
While real estate agents and their clients can craft specific contingencies tailored to circumstances, which is helpful in military life, there are common contingencies used again and again. These are seven common examples.
1. Mortgage or Financing Contingency
Buyers use a mortgage contingency (most states require it in purchase agreements) to ensure they can back out of the deal if they can’t get a loan approved. Since most buyers use financing, this is an exceedingly common contingency.
Home sellers are sometimes wary and often pick competing cash offers because securing financing is one of the biggest uncertainties of the buying journey, even with mortgage preapproval.
2. Home Inspection Contingency
Most people have heard of a home inspection contingency. As a buyer, it provides a little more peace of mind through an inspector's report. Once the information comes back, the buyer and seller must reach an agreement to address uncovered issues to keep the sale on track.
They can negotiate the sale price, or the seller can fix the issues or offer repair credits. If there’s no agreement, the buyer can walk away.
Although real estate pros don’t often advise waiving home inspections, home buyers sometimes waive this contingency to make their offer more attractive in powerful seller's markets.
3. Appraisal Contingency
Most mortgage lenders, including VA loan servicers, require a home appraisal before the financing can go through to protect their investment. They want to make sure they’re only loaning the property’s fair market value.
With an appraisal contingency, if the home doesn’t appraise for the sale price, the buyer can ask for a lower price, add more cash to make up the gap, or either the buyer or seller can use an appraisal contingency to end the deal.
4. Home Sale Contingency
One of the first contingencies to go during a hot seller's market is the home sale contingency. It states that the deal will go through only if the buyer’s current home sale closes. Buyers use this contingency to apply the cash proceeds toward their new home.
Essentially, the seller waits for the buyer’s buyer to secure financing, taking longer than they'd prefer. Normally, a home sale contingency has a lifespan of 30 to 60 days. If that time passes, the deal officially ends.
5. Title Contingency
Sometimes buyers and sellers think all is well with the sale progress, and then something unusual pops up with the property’s title, like a lien. A title contingency gives the buyer the right to order a title search to ensure the transfer goes through. If there’s a problem, they can end the sale process.
6. Homeowners Insurance Contingency
Home sellers and mortgage lenders sometimes require the buyer to apply for and obtain homeowners insurance before the sale can close.
Buyers like the homeowners insurance contingency because it frees them from the deal if their insurance company finds the property uninsurable.
7. Other Contingencies
Real estate agents and their clients can write contingencies that fit distinct circumstances. For example, a seller may see language requiring the house to obtain termite certification or a contingency limiting the number of days to close the sale.
Home Sale Contingencies and Earnest Money
Contingencies help buyers retain their earnest money held in escrow. Most buyers keep their earnest money if the sellers don’t meet their contingencies. However, if the buyer defaults under the contract, the seller retains the earnest money.
Not all of these contingencies will apply to every situation. For example, buyers making an all-cash offer won't need to meet lender requirements.
If you have questions about which contingencies make sense for your home purchase, discuss them with your real estate agent and, if necessary, a real estate attorney so you can move through the homebuying process with clarity and confidence.
