Many new homebuyers are unfamiliar with the term “contingencies” because they’ve never gone through the purchasing process before. Usually, the first time this topic comes up is when they make their first offer on a home.
As foreign as the word may be, contingencies are a normal part of buying a home. Below, we’ve provided a quick overview of contingencies and discussed some of the most common ones.
What Are Contingencies in Real Estate?
In real estate, contingencies are a condition or actions that must be fulfilled for a purchasing contract to become legally binding. Contingencies are put in place to protect buyers and, in some cases, the seller of the home. Sometimes, they are also used as part of the negotiating process. For example, a buyer may choose to waive certain contingencies to make their offer more appealing to the seller.
Explanation of Common Contingencies
Real estate contracts are legally binding. Therefore, new homebuyers need to understand all aspects of their contract, so they know exactly what they’re agreeing to. This includes contingencies. Here are some of the most common contingencies that occur during a home purchase:
This contingency refers to common inspections like pest inspections, mold inspections, and home inspections. Buyers obtain inspections because they help them understand the condition of the home. This contingency allows a buyer to back out of a contract if the inspection reports are not to their satisfaction.
If you’re obtaining a loan to buy the property, you’ll most likely want to include a financing contingency. This contingency states the buyer is only obligated to purchase the home so long as they are able to receive financing. That way, the borrower is not responsible for buying the home if their loan does not go through.
When you buy a home, your mortgage company will most likely require you to have the property appraised. An appraisal report tells you how much the home is worth. Market conditions are taken into consideration when determining this amount. Lenders very rarely approve loan amounts that are higher than the appraised value. Therefore, in order to obtain a loan, the house must be worth at least as much as you’re buying it for. If the appraisal report is not satisfactory or comes in low, the buyer is able to back out of the contract or renegotiate the price with the seller.
At some point during the purchase process, your lender will order a title search. A title report confirms that the title can be transferred to the buyer free and clear. If there are issues with the title, this contingency allows the buyer to back out of the contract. This way, you don’t have to worry about dealing with the possibility of contested ownership or paying off someone else’s debts.
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