Understanding Home Buying Contingencies

In most home buying situations, the buyers and sellers are likely to be strangers with no common relationship on which to base mutual trust. Luckily, the real estate contracts used by most licensed real estate professionals are designed to offer buyers and sellers a measure of protection against potentially costly issues that might arise during the transaction.

In addition to the purchase offer forms and disclosures, real estate contracts include contingencies to help buyers and sellers deal with important parts of the transaction, such as financing, appraisal, and inspections. 

Contingencies on Financing

A common contingency for buyers to use when buying a home is the one regarding financing. Basically, this contingency gives the buyer a certain time frame - negotiated between the buyer and seller - in which to secure any necessary financing needed to complete the purchase.

Buyers should be extremely hesitant to waive a contingency on financing, unless their mortgage pre-approval is solid. This will help them to avoid potentially serious ramifications should the loan process fail later in the transaction.

Contingencies on Appraisal

Lenders want to make sure the buyer has selected a home with a value that will support the amount of the mortgage, and they use the appraisal process to determine this information. If the appraisal comes in below the mortgage amount within the time frame of the appraisal contingency, the buyer can seek to renegotiate price with the seller, pay the difference between purchase price and loan amount out of pocket, or withdraw from the transaction, among other potential options.  

Contingencies on Inspections

While the contingencies on financing and appraisal can be important for the protection of the buyer, contingencies relating to inspections might be considered the buyer's protection against the unknown. Inspection contingencies are commonly used to give the buyer time to seek and obtain professional inspections on the entire home, or any portion or components they choose, including HVAC systems, roofs, foundations, etc. for defects and deterioration. Inspections should also be done for termite infestations and other issues that could be expensive to repair. 

Once the inspection is completed and the results obtained, buyers typically have a specific time frame in which to ask the seller to address any issues of concern noted in the report.

Possible options can include:

• renegotiating the price or terms of the sale
• a seller credit to the buyer to cover the cost of repairs
• a seller agreement to have buyer-requested repairs made prior to closing
• cancelation of the transaction
• other specific agreements negotiated between the buyer and seller

Buyers can order any inspections they desire during the inspection period, but they are also responsible for choosing the inspectors used and paying for the actual inspection in most cases. If possible, buyers may want to attend the inspections so that they can speak with the inspector and ask any questions they may want answered. 

A word of caution

The exact uses and wording of these and other contingencies can vary in different states and regions, making it vitally important that both buyer and seller consult with their real estate professional or a real estate attorney to make sure they have a good understanding the contingency process before utilizing it.