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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 often 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 appraisal contingency would outline next steps.

Inspection Contingency

A home sale is sometimes contingent upon the buyer's satisfaction with the results of 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
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 options on how to address this issue.

Hint: title insurance is often recommended by the closing company as it protects the homebuyer against any some title issues that may have been missed or that crop up later.

Home Sale Contingency

In some cases, the potential buyer makes their offer contingent upon selling their current home first. If their home does not sell within the agreed-upon period of time, it's possible depending on the terms and wording of the contingency that the purchase will not move forward.

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.

Contingencies are a great way to make sure you're protected as a buyer and help ensure you don't end up in an unexpected position when purchasing a home.

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.

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