Everything You Need To Know About Home Buying Contingencies

Home buying contingencies are common in the real estate industry. Contingencies are meant to protect you as a buyer, meaning that the sale and purchase of a property will take place only if certain conditions are met. As a buyer, you can bow out of the transaction at any point if you feel that the conditions that were decided are not being met. 

However, for sellers, contingencies mean a higher risk of the deal falling through. For instance, the most common contingency is financial. The buyer can make an offer for the property, but the deal is contingent upon them obtaining a mortgage from a lender. 

Let’s look at the most common home buying contingencies that exist in real estate transactions.

The Most Common Home-Buying Contingencies

1. Financing Contingency

As mentioned earlier in this post, a financing contingency is when the sale of the property is contingent on the buyer obtaining a mortgage successfully. 

The ability of a buyer to obtain a mortgage depends upon various factors, like credit score, salary/income, liens (previous and current), and debt to income ratio. Home buyers can use a financing contingency as protection,  just in case their loan application does not get approved. 

For instance, the financing contingency generally contains a clause stating that the buyer must get a full refund of the earnest money, without any deductions, in case they are not able to secure the funding. 

That’s why sellers usually require a pre-approval from potential buyers to ensure that such a situation won’t arise during the process. 

2. Home Inspection Contingency

Issues in construction are inevitable even if you inspect a newly constructed home. While some of the issues are easily fixed, other big issues can become potential problems for the buyer in the future. 

A home inspection contingency is when you have a specific number of days to get a home inspection conducted after making the offer. If the results of the inspection are not up to the mark or you are unhappy with the results, you can back out of it. 

3. Appraisal Contingency 

If the buyer is seeking a loan to buy the house, then the lender is bound to have an appraisal of the property to confirm that the assessed value of the house and the asking price are accurate. Generally, third-party appraisers are hired to carry out this job. They look at the comps, measure the square footage of the house, assess the condition of the house, and keep similar considerations into account during the appraisal.

If the assessment comes in line with the asking price, then the buyer can go ahead with the deal. However, if it comes lower, then either the seller must lower the asking price to the assessed value or the buyer must pay the difference in cash.

4. Title Contingency

In real estate terms, title is the legal document that reflects the record of ownership of a property. This includes information like who has owned the house in the past, who is the current owner, listing if there are any liens on the property, if there are any pending judgements against the property. 

Although most of the issues related to the title of the property can be easily resolved, there are certain problems that cannot be solved. A title contingency ensures that you are dealing with a property with a clean record. Just in case, the title is not cleared, you have the option to leave the sale without having to worry about any obligations. 

5. Home Sale Contingency

Home sale contingency comes into the picture when a buyer must sell their existing house to be able to afford the purchase of a new house. Many buyers get stuck in this situation.

With home sale contingency in play, they have the assurance of keeping their earnest money intact while getting a specified amount of time to look for a buyer for their existing home. 

As one can easily guess, sellers preferably avoid offers with home sale contingencies, primarily because it puts their home sale into pending status. When dealing with home sale contingencies, sellers would have to take their homes from the market without any assurance that the buyer is definitely going to be able to purchase the house. It also delays the process, making a deal with a home sale contingency less attractive. 

Waiving Off Home-Buying Contingencies

Sellers prefer offers that are clean, and without any contingencies because those offers are safer. This is the reason that during bidding wars people often waive off these home buying contingencies. However, you need to be careful when considering waiving off contingencies, as it might put you at a higher risk. 

Here’s are a few things to keep in mind when you are considering waiving off different home buying contingencies from your contract:

Waiving Off Financing Contingency

Applying for preapproval is the best way to ensure that you will have no problem securing a mortgage. Besides this, here are two important things that you must know in order to waive off financing contingency: 

• Get a clear picture of your financial health, which includes your credit score, your consistency of income, previous liens, and similar factors that may impact your ability to get mortgage approval.
• Prepare a backup plan for the worst-case scenario, just in case your loan falls through due to any unexpected reason.

Waiving Off Inspection Contingency

Though it puts you at high risk, you may want to consider waiving off the inspection contingency only if:

• You know about all of the issues in the house already
  
• You know how well it was maintained by the previous owners
• You have the finances to address any big structural issues that could arise

Waiving Off Appraisal Contingency

If you waive off the appraisal contingency, and things don’t go as planned i.e. the appraisal of the house comes too low, you are putting yourself at the risk of paying thousands of dollars. Therefore, before waiving off the appraisal contingency, you should ask yourself:

• How confident are you about your judgment of the property’s value and your bid?
• Do you have sufficient finances to pay the difference, in case of a low appraisal

Waiving Off Title Contingency

Having issues with the title is uncommon, but that doesn’t mean it’s smart to waive off the title contingency. Not having the contingency can put you at the risk of paying thousands of dollars in previous liens or taxes. Or worse, it could lead you to losing the property altogether.

The risk of not using a title contingency becomes even bigger when you are buying a foreclosed house or a house in a short sale. 

Waiving Off Home Sale Contingency

It’s easy to waive off the home sale contingency if you are planning to buy a house as an investment property. This means that you are not looking to immediately move into the new house. So, waiving off the home sale contingency to win the bidding war can be a useful technique.

However, if you are looking to move into a new house immediately after the purchase, then you should consider not waiving the home sale contingency. 

The Bottom Line

There are definite pros and cons to using contingencies. As already stated, contingencies protect the buyer. On the other hand, contingencies can make the home buying negotiations a lot more complicated. The mere existence of contingencies makes offers less attractive. You need to assess all of the good and the bad about contingencies before deciding to use them or waive them off.

Just in case, you still want to waive off the contingencies to win the bidding wars, do it only after discussing with your real estate agent or lawyer about how to handle the consequences if things go wrong.