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What is a real estate contract contingency and which are most common?

Types of Contingencies

What exactly is a contingency you ask? Well, put simply, it's a clause added into a purchase offer by the buyer stating that certain conditions must be met before the sale of the home is complete. A purchase offer can potentially include many different contingencies, so let's take a look at the most common.

what is a real estate contract contingency

Financing Contingency

If the buyer will be using a loan to purchase a home this contingency is especially important as it allows time to apply for and receive a loan for the amount needed to purchase the home. Many assume that a preapproval is sufficient, however, nothing is finalized until a loan is granted. If during this process something goes awry with the buyer's financing and it falls through, the financing contingency allows them to back out of the sale without any penalties.

Appraisal Contingency

Once the mortgage lender orders an appraisal the findings will determine how much money they will be willing to lend to the homebuyer. If the appraisal shows that a home is worth less than the sale price, or what has been offered for the home, the buyer can attempt to renegotiate a lower offer with the seller (since the lender will not lend more than what a home is worth) or choose to walk away from the deal.

Inspection Contingency

A home sale is almost always contingent upon passing a home inspection. An inspection contingency gives a buyer the opportunity to negotiate with the Seller for repairs to be done or in some cases, back out of the sale, pending the home inspection.

At a high level the home inspection will include a 1,600 point checklist to evaluate:

  • Interior of the home
  • Exterior of the home
  • Plumbing
  • Electrical
  • HVAC
  • Foundation

Per the home inspection contingency, the contract will only move forward when the inspection is complete and both parties agree on necessary repairs. If the findings of the inspection report reveal extensive issues or damage (such as foundation concerns) or if the buyer and seller cannot agree on repairs, then per the inspection contingency the buyer can walk away from the deal — no questions asked (as long as it is within the inspection contingency timeframe) AND have their earnest money deposit returned.

types of mortgage contingencies

Clear Title Contingency

This contingency protects the buyer specifically in the case that it's found that the home title is not clear. If there is an issue with the title to the home (doubt in ownership or liens against the house) it gives the potential buyer the option to walk away from the deal.

Hint: title insurance is highly recommended as it protects the homebuyer against any future title issues that may have been missed.

Home Sale Contingency

In some cases, the potential buyer makes their offer on a house contingent upon selling their home first. If their home does not sell within the agreed-upon period of time the deal is void and the house goes back on the market. While this is a great contingency for buyers, it doesn't do the seller many favors and can be hard to get the sellers to agree to this contingency, especially in a seller's market.

Home Insurance Contingency

This contingency is typically included by your mortgage provider and will require at least a basic homeowners insurance policy be applied for and obtained by the buyer prior to the sale being finalized. Homeowners Insurance is a policy that covers your home, structures and personal possessions during natural disasters and theft. Each policy written will depend on the state, the policy you choose and even the insurance company.

The last thing the bank wants is your home to be destroyed by a natural disaster which could result in a “total loss" meaning the bank will not get their payments from you. Keep in mind that depending on the location of the house, it can sometimes be difficult to secure an insurance policy so make sure you take that into account when making an offer on a home.

Mortgage contingencies are a great way to make sure you're protected as a buyer and help ensure you don't end up in a position where you must buy a lemon of a home or lose money. Assuming all of the contingencies are met, the home sale moves to pending before becoming a final sale, hooray!

Knowing all of your contingency options as a buyer is a very important step in making an offer on a home. If you're unsure about which contingencies would be best for you, make sure to chat with an experienced and knowledgeable Real Estate Agent who can help you make an informed decision based on your specific situation.

Want more advice about all things home — including homebuying or selling advice? Nestiny is a great place for homebuyer education and to help you gauge how ready you are to buy a home. Journey Homeward allows you to enter all your wants and needs while the True Affordability Tool will break down your budget, showing what you can comfortably afford. You will also receive a Ready Report that will give you a vital head start in the home buying journey, saving you valuable time and money.

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Ready To Become A Smarter Homebuyer?

By signing up, you agree to Nestiny terms of use .
Whether you need a step-by-step guide, video resource or one of our many helpful tools, Nestiny has your back 24/7 for all things home buying and selling. You choose the pace, material, and when and where to learn. Unlock your free access to Nestiny today!
Are you a real estate professional? Go here .
By clicking this button, you'll enjoy free unlimited access to Nestiny and agree to our terms of use . And don't worry! Nestiny will not share your information with any parties without your consent.