What You Need to Know About Home-Buying Contingencies

There are multiple steps in any real estate transaction that have to be completed before the sale can complete. There are showings, inspections, financing requirements, and so much more, all of which is often written into the purchase contract as a home-buying contingency to ensure that everything goes smoothly and that there's recourse should one party fall through on an agreement. Home-buying contingencies are clauses in the home buying contract that allow the buyer to cancel the purchase or renegotiate the contract under certain circumstances. In a typical contract, there are three standard contingencies that are likely to appear. Familiarizing yourself with these contingencies can help guide you through the home buying process.

Inspection Contingency

The inspection contingency allows a home owner to renegotiate the price of the home or cancel the purchase of the home depending on the findings from the home inspection.

One of the first things a home buyer does after entering into the escrow period is schedule a home inspection for the Fairfax home. The inspector goes through the house thoroughly and uncovers the problems that exist with major systems like the roof, plumbing, electrical system and so on. The inspector writes a report to be reviewed by the home buyer, who then must decide what action to take.

Most home inspections will reveal problems with a property. Often, home buyers will use the inspection to negotiate repairs or a lower price for the house. Sometimes the inspection will lead the home buyer to cancel altogether.

In some parts of the country, it's typical for the inspection contingency to be waived by home buyers who perform a pre-inspection before making an offer. Without a pre-inspection, however, waiving the inspection contingency can be very risky. Home buyers who are thinking about waiving their inspection contingency without performing an inspection should talk with their real estate agent.

Appraisal Contingency

In order for a loan to fund, the home must be appraised. The appraiser comes to the home and performs an inspection, which he or she then uses to make the appraisal. If the appraisal is more than or equal to the amount that the buyer has agreed to pay, the loan can still go through as planned. If the appraisal is lower than the sale price of the home, the mortgage lender will reduce the loan accordingly. Under these circumstances, the appraisal contingency enables the home buyer to change the offer.

For example, a buyer offers to pay $100,000 for a home, and the seller agrees. The buyer intends to borrow 70% of the purchase price, or $70,000. The appraisal comes in at $90,000, so the lender will only approve a loan equal to 70% of $90,000, which is $63,000.

Under these circumstances, the buyer will either need to:

• Renegotiate the sale price of the home,
• Cancel the purchase, or
• Cover the difference.

The appraisal contingency is what allows the homeowner to do this. If the appraisal goes through at or above the asking price of the home, the home buyer can then lift the contingency.

Financing Contingency

The financing contingency allows the home buyer to cancel the purchase of the home if the loan does not fund for whatever reason. There are many reasons that the loan may not fund. Sometimes loans fall through because home buyers have given incorrect information, other times home buyers have failed to provide all the relevant information during the pre-qualification process.

Communication with the loan officer is key to ensuring that the loan will go through at the right time. Getting pre-approved instead of pre-qualified can also help. It's also important not to make big financial changes during the home buying process. Avoid making major purchases that could increase your debt-to-income ratio. If any changes do occur with your employment status or salary during the home buying process, call the loan officer right away.

Once the loan does fund, the financing contingency can be lifted and the home can finally be purchased.

The Fourth Contingency

Many second-time home buyers need to sell their first home before they can buy their second home. If they find a home to buy before they can sell their current home, the home sale contingency will allow them to make a tentative offer that can be retracted if their home does not sell within a given time frame.

This kind of arrangement can make an offer less competitive, so in a seller's market some home buyers will refrain from using this contingency. If you're a homeowner looking for a new home, your real estate professional can help you decide whether or not putting this contingency in your offer is a good idea.

Work With a Real Estate Professional

Many home buyers find purchasing contracts to be confusing. Working with an experienced real estate professional can help you through this process. To find out more about contingencies and how they might affect you during the home buying process, speak with your real estate professional.