What Every Homebuyer Needs to Know About Home Sale Contingencies
A contingent offer is an offer that has been accepted with the final sale depending on meeting specific criteria. What sort of criteria? That's what this article will explain. Bookmark this reference if you're currently shopping for a home. And remember to send it to your friends, too! All prospective homebuyers can benefit from this information.
Types of Home Sale Contingencies
There are three main home sale contingencies: home inspection, appraisals, and mortgage approval.
These contingencies are meant to protect you, the buyer. They allow a legal way to back out of the sale should something go wrong during the closing process.
Let's take a closer look at the types of contingencies and how they usually work.
Home Inspection Contingency
A home inspection contingency, sometimes called a due diligence contingency, is part of every home sale unless you waive it. We encourage you never to waive it under any circumstances.
Its primary purpose is for a professional home inspector to reveal any flaws in the home so that you can re-negotiate or cancel the contract based on the findings.
Here's a few examples of what that might look like:
- You can request more time for additional inspections if you think something needs another look.
- You can terminate the sale and get your earnest money refunded.
- You can ask the seller to complete the repairs.
- You can request the price to be lowered, taking into account the cost of making those repairs.
The appraisal contingency ensures that you can terminate the contract if the home does not appraise at that minimum amount. In most cases, your earnest money will be refunded if that occurs.
This type of contingency can also include terms that allow you to buy the home at the original price despite the low appraisal. Alternatively, you can request a lower selling price.
However, keep in mind that if you are financing the purchase with a mortgage, your lender might only cover the appraised cost.
Just like a home inspection contingency, the appraisal contingency shouldn't be waived.
A mortgage contingency states that the offer is dependant on you securing financing to purchase the home. It's beneficial in that it gives you a legal way out of the contract should you be unable to get approved for a loan.
However, sellers are often wary of accepting these types of offers as it lacks the assurance of financial backing.
Note that this contingency has a time limit for getting a home loan. If you cannot get approved on time and haven't terminated the contract before time runs out, you'd still be financially obligated to purchase the home.
So while this contingency is beneficial, you'd be better off getting approved for a home loan before making an offer.
Home Sale Contingency
A home sale contingency is when your offer is dependant on the sale of your current home. There are two types of home sale contingencies. We'll explain them below.
Sale & Settlement Contingency
A sale and settlement contingency happens when you, the buyer, haven't yet received or accepted an offer on your current home. In this situation, the seller of the new home will be able to market their home to other buyers despite accepting your contingent offer.
Should another buyer make an offer, you'll have about 24 – 48 hours to remove the contingency and move forward with the purchase. If you're unable to remove the contingency, your sale contract is terminated, and you'll get your earnest money back.
A settlement contingency is when you, the buyer, have accepted an offer on the home you're currently selling, and you have a closing date on the calendar. This type of contingency typically doesn't allow the seller to keep marketing the home.
As long as your home closes on the date listed in the offer, the sale contract remains valid. But if the property doesn't close on time, the contract can be terminated, and you lose the home.
Did you find this article helpful? Please share it! And please contact us for more mortgage advice and pre-approval answers.