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A central piece of the home-buying process is the purchase contract. These few pieces of paper have the power to decide when and how your new dream home will become your own.
Nearly every contract comes with contingencies—conditions that must be met for the home purchase to take place. Common contract contingencies allow buyers to back out of a sale without losing their deposit if something goes wrong. As a homebuyer, it’s important to understand your contingency options and how they work so you can protect yourself from a home deal gone bad.
Common Contingencies and How They Work
When you make an offer on your new home, your real estate agent will help you decide which contingencies to include based on your personal situation. Here are the three you’re most likely to encounter:
Home Inspection: With a home-inspection contingency, the buyer has the right to a professional inspection of the home. If the inspection turns up major problems, the buyer can request the seller fix the problems, reduce the price or cancel the contract.
In a hot housing market, some buyers can be tempted to skip the home-inspection contingency to make their offer more appealing. But it’s never a good idea to buy a home without having it inspected by a pro first. You could end up paying too much for a home with expensive structural issues.
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Appraisal: No one wants to overpay for a home. An appraisal will make sure a buyer knows the fair market value before the sale is final. If the appraised value is less than the sale price, an appraisal contingency allows the buyer to back out of the contract or negotiate a lower price with the seller.
Financing: The financing contingency gives the buyer a certain time frame to get approved for a mortgage. Buyers need to be preapproved for their loan before they make an offer to avoid trying to buy a home they can’t afford. Being preapproved also speeds up the loan-approval process once an offer is made.
Buyers who pay cash for a home don’t need to include this contingency in their contract. That can be a huge plus with sellers who don’t want to wait for a buyer to secure financing.
As you can see, contingencies protect the buyer from paying too much, ending up with a home that has major structural issues, or being forced to buy a home without proper financing. Sellers benefit as well. If all the conditions are met, then the buyer cannot back out of the purchase without financial or, sometimes, legal consequences.
But buyers need to be cautious of using too many contingencies in their purchase contracts. Sellers won’t want to deal with a buyer who puts a condition on everything.
One example of this is the home sale contingency. This clause gives the buyer a specified amount of time to sell a home so they can finance a new one. If the home doesn’t sell, the buyer can back out of the purchase contract on the new home. That forces the seller to pass up any other offers while they wait for the buyer’s home to sell.
It’s best for everyone when the buyer sells his current home before shopping for a new one—even if that means renting for a short time.
Understand Your Options
Clearly, these are just a few of the ways to use home-buying contingencies. When the time comes for you to make an offer on your new home, work with an experienced real estate professional who can explain each part of your purchase contract and how it affects you. Then, with your agent’s guidance, you can decide which contingencies to include in your offer to make sure you end up with a great home at a great price.
Your agent will also help you keep up with your contingency deadlines so that your home purchase is settled on time and as smoothly as possible.
If you’re looking for a high-octane agent who’s willing to do what it takes to help you seal the deal on your dream home, we can put you in touch with a real estate pro Dave recommends in your area today!