Submitting an offer on a home is a huge deal. When submitting the offer, the buyer(s) are required to provide an ‘earnest money’ deposit to the home owner as a show of good faith that they are fully committed to their offer. For many buyers, it can feel like a huge risk. This can cause buyers to ascend into a rabbit hole of “what if” questions.
What if the home isn’t worth what we are offering?
What if there is an issue with our financing?
What if we can’t sell our home soon?
These are all legitimate questions. Fortunately, for home buyers, there are a handful of common contingencies worked into most purchase contracts. Here are the most common buyer contingencies found in most all home purchase contracts (unless negotiated otherwise).
- Financing contingency: Gives a buyer protection by enabling them to terminate the transaction and receive their earnest money back in the event that they are unable to obtain a mortgage loan within a predetermined period of time. This provision acts as a safety net, guaranteeing that the buyer won’t suffer financial consequences in the event that their loan application is rejected or if unforeseen financing problems emerge. During the contingency period, the buyer usually gets 30 to 60 days to apply for, get approved for, and complete their mortgage.
- Inspection contingency: Permits a buyer to view a property within a predetermined window of time to make sure it is in good shape before deciding whether to move forward, negotiate repairs or a price reduction, or end the contract and get their earnest money back.
- Appraisal contingency: Permits a buyer to renegotiate the price or cancel the agreement if the home’s professional appraisal is less than the agreed-upon purchase price. If the buyer and seller are unable to renegotiate the price to the appraised value, the buyer can cancel the agreement without penalty.
- Title Contingency: Safeguards buyers by requiring a seller to provide a clear and valid title to the property. If any title defects or incumbrances exist, the seller must remove them or the buyer has the ability to exit the deal and receive their earnest money.
- Home sale contingency: Provides the buyer time to sell their current home (if needed) before moving forward with the transaction. If the buyer is unable to sell their home in the negotiated timeframe, they can cancel the purchase contract with no penalty. This is a less common contingency due to most sellers rejecting contracts like this en lieu of keeping their home on the market to procure a buyer without a home sale contingency.
Contingencies are always a negotiable aspect of a good purchase contract. With the appropriate contractual safeguards in place, buyers can remove some of the risks associated with buying a home.