In real estate, a "contingency" refers to a condition of the Agreement of Sale that needs to occur in order for the transaction to keep moving forward. As the buyer, there are many contingencies that you can choose to include in your contract. However, I've chosen to focus on the five most common ones. Below is an explanation of what these contingencies are and how they work so that you can go into your transaction feeling informed.
In the home buying process, inspections are for your benefit, as the buyer. They allow you to get a full picture of the condition of the home that you intend to purchase. Most buyers know about the home inspection, which covers a general examination of the interior and exterior of the home, as well as its systems. However, there are several other inspections that fall under this contingency, such as ones for mold or damage from wood-destroying insects.
Once you've completed all your inspections, that's when the contingencytruly comes into play. You'll receive reports for all the inspections you've elected, as well as recommendations on how to remediate the home's problems. You'll then have the opportunity to negotiate with the seller on repairs. If you can't reach an agreement, or if you simply feel that the home needs too much work for you to handle, you can walk away from the sale.
If you're planning on buying your home using a mortgage, you're going to want to elect the financing contingency. This contingency gives you time to apply for and receive a loan in order to purchase the home. It says that, if for some reason you're unable to receive financing, you have the right to look for alternative sources or to back out of the sale.
Many buyers, especially first-timers, make the mistake of thinking that their financing is set in stone once they receive a pre-approval. Unfortunately, that is not the case. A pre-approval is not a guarantee of a loan. It's merely the start of the process. From there, you still have to apply for a specific loan program and go through the underwriting process.
The underwriting process is where some people run into trouble. Here, an underwriter will take an in-depth look at your financials and provide a list of their own conditions that you need to clear in order to receive the loan. If you're unable to clear those conditions or if there's an issue with your financials, the mortgage company reserves the right to deny your loan request. At that point, you might use the financing contingency.
The appraisal contingency goes hand-in-hand with the financing contingency. In fact, receiving a satisfactory appraisal is usually one of the conditions that the mortgage company has for granting you a loan. Remember, an appraisal determines the fair market value of the home. The appraisal contingency ensures that you're protected if the sale price doesn't fall in line with whatever the fair market value is determined to be.
It works like this: Let's say you and the seller agreed to sell the house for $200,000, but the appraisal only comes at $180,000. Since the mortgage company is only allowed to loan you up to the fair market value of the home, there's a $20,000 difference that you're responsible for making up. In the best-case scenario, you'll be able to renegotiate the sale price with the seller or to find additional financing. However, if both those options fall through, the appraisal contingency allows you to back away from the deal, unscathed.
In real estate, the title to a home is the record of its ownership. It's a legal document that shows who has owned the home, past and present. It's also a record of any liens or judgments that have been made against the property. In a typical scenario, a title company or your attorney will review the title on your new home before closing and resolve any issues so that the title can be transferred to you free and clear.
However, there are a few occasions where problems with the title report cannot be solved before closing. That's where the title contingency comes in. It gives you the option to leave the sale rather than having to deal with the possibility of contested ownership or having to pay off someone else's debts.
Home Sale Contingency
The last contingency I'll mention, the home sale contingency, is a favorite amongst buyers — and it's not hard to see why. This contingency allows you a specified amount of time to find a buyer for your current home. If you can't find a buyer within that time, you have the freedom to walk away from the sale with your earnest money deposit still intact.
Unfortunately, this contingency isn't used very often anymore. As you might imagine, it wasn't very popular among sellers, who would take their homes off the market for little-to-no assurance that the buyer would ultimately be able to purchase the home. Though you can still choose to include it, be aware that it weakens your offer. These days, most sellers will pass offers with this contingency over, even if they have to wait for a better option.
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