Common Types of Contingencies

As a home buyer, there are several common contingencies that you can include in your offer, but that doesn’t mean the seller is going to accept them. If a property has been on the market for several weeks, an anxious seller may accept multiple restrictive contingencies. On the other hand, the seller of a hot property that is newly listed and has already received multiple offers, is unlikely to accept many (if any) contingencies.

Here are the most common contingencies:

1. Inspection Contingency
An inspection period is often known as a “due diligence” period in most states. Home inspection contingencies has become so commonplace that the vast majority of sellers expect it and typical agree to it. Who wouldn’t want to have an expert inspect a home before they take out a mortgage to purchase it?

The important thing to note here is the number of days provided for the home inspection contingency period. For the seller, it’s best if this period is short (ie. less than 5 days). For the buyer, you’d want this home inspection period to last 10 days or more. In general, one week is typically what we see in a normal market. During this inspection period, the buyer will hire an inspector to perform an evaluation of the property to discover any possible problems with the roof, plumbing, electrical, etc.

Some sellers will even hire their own inspectors before even putting their home on the market, just to make sure they’re not going to run into any problems.

2. Appraisal Contingency
All lenders will require that a home appraisal be done before they’ll provide funds to a buyer. Some exceptions exist, if the buyer has a very large down-payment and the home qualifies for a “desk appraisal” – which is an automated valuation. The lender wants to be certain they’re not lending any more money than is absolutely required for the house after taking into account the down-payment made by the buyer.

Of course, when it comes to the value of a property and the purchase price, homebuyers should also want to verify the home value. No one wants to spend more than they need to on anything, much less an investment as big as a home. If you’re the seller, learn more about how to prepare for a home appraisal.

With an appraisal contingency, the prospective buyer is stating that they won’t pay more than the amount the appraiser values the home at. So, if the appraisal comes in lower than the contract price, the buyer has an opportunity to re-negotiate the price or terminate the contract.

3. Financing Contingency
It’s important to understand what to expect when getting a home mortgage because you don’t want to find your perfect home, then get an offer accepted only to discover that you can’t get a loan approval for the property.

A financing contingency (or mortgage contingency) protects the buyer in case they are unable to obtain a mortgage for the property. If the buyer is unable to secure financing from the mortgage lender prior to the end of the financing contingency period, they are able to back out and keep their earnest money.

4. Title Contingency
Before you can close on a home, the title company must carry out a thorough title search to check for any possible issues that might challenge the validity of the sale. Otherwise, you could buy a house only to later learn that the former owner’s ex-wife still has a claim on it.

A title contingency allows the buyer to back out of the sale if the title search comes back with any problems.

5. Home Sale Contingency
For a homeowner looking to buy a new house, finding the perfect home and making an offer is only half the battle. They still have to sell their own house, too. Say you’ve just accepted an offer on your home, but the buyer still has to sell their own. Until they do, they can’t actually get the mortgage they need to pay you.

A further provision of a home sale contingency is a kick-out clause. With a kick-out contingency in place, you’re essentially telling the buyer that you reserve the right to cancel the sale if another buyer comes forward with the funds needed to complete the sale.

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