Common Types of Homebuying Contingencies

Learn About Common Contingencies for Home Purchase Offers

When making an offer on a home, you can usually include contingencies, which are requirements that must be met before your offer can be considered final. When contingencies aren't met, you can typically back out of a purchase agreement without a penalty, such as forfeiting your earnest money deposit.

Contingencies can help reduce your risk when you're purchasing a home. However, they can also make your offer to buy a home less attractive to the seller. That's because offers with contingencies can make it less likely that you'll buy the home, so sellers may prefer a similar offer with fewer contingencies from another buyer.

Let's dive into some common homebuying contingencies to consider.

Home Sale Contingency

This contingency makes your offer to buy a home dependent on selling your current home. A home sale contingency also often defines a selling timeline. If the home doesn't sell during that period, the purchase offer will be canceled. While home sale contingencies are fairly common and can protect buyers by giving them time to sell their home first, many sellers may be reluctant to accept them.

Financing Contingency

A financing contingency, also called a mortgage contingency, makes your offer to buy a house dependent on getting approved for a mortgage. It usually defines how long you have to secure financing from a lender, and if you're not approved for a mortgage in time, you can back out of the contract.

Getting prequalified for a mortgage could make sellers more willing to accept this type of contingency, because it may give them more confidence that a lender will offer you a loan.

Appraisal Contingency

Appraisal contingencies can protect you as the buyer if a home appraisal shows the home is worth less than the purchase price you and the seller agreed upon. This kind of appraisal can give you some room to negotiate. For example, if you offer to buy a home for $350,000 and the appraised value is $340,000, you might ask the seller to reduce their price by $10,000.

On the other hand, if you offer to buy a home for $350,000 and the appraised value is $200,000, this contingency could let you withdraw the offer and get your earnest money back. An appraisal contingency can also help protect you when you apply for financing—mortgage lenders usually won't give you a loan if the sale price of a home is significantly higher than its appraised value.

Home Inspection Contingency

Much like it sounds, a home inspection contingency makes a home purchase reliant on a thorough inspection. Home inspections evaluate the house's structure, heating and cooling systems, electrical systems, plumbing, and more.

If there are issues, this contingency can allow you to negotiate with the seller to fix the problem or reduce the selling price. It can also allow you to withdraw your offer if major issues are found. For example, if the inspection finds an old and unreliable water heater, you can ask the seller to replace it before the sale closes. If there's extensive termite damage and problems with the foundation, this contingency might allow you to withdraw your purchase offer.

Home inspection contingencies can also distinguish between less expensive and more expensive repairs based on their dollar amount or percentage of the sale price.

Title Contingency

Title contingencies are there to help protect you if any problems are found during the property title search. Issues like liens, unpaid taxes, and ownership disputes can prevent a smooth transfer of ownership, so this contingency ensures you won't inherit legal problems tied to the property.

With a title contingency, you can get out of the contract or request that the seller resolve the issues before the sale progresses.

Homeowners Insurance Contingency

An insurance contingency lets you back out of a home sale if you can't secure affordable homeowners insurance to protect your new home. This can be especially important for homes in areas affected by wildfires or flood zones, or areas prone to high insurance costs.

Before you close, if you discover you can't find available coverage that's reasonably priced, you can walk away from the deal without losing your earnest money.

Benefits and Risks of Homebuying Contingencies

There are pros and cons to including contingencies in your offer to buy a home. They can protect you from financial risks and the costs of expensive repairs, but they can also make your offer less attractive to sellers.

Some benefits for buyers include:

• Less risk: Contingencies can help you avoid buying a home with too much potential for risk. You're able to back out of a purchase without penalty if significant issues arise.
• Ability to negotiate: You can request repairs, a lower purchase price, or other seller concessions if issues with the property are discovered.
• More time to decide: You'll have more time to breathe while you secure financing and ensure the home meets your standards.

Risks to consider include:

• Less attractive offer: Sellers may prefer offers with fewer contingencies attached, particularly if the market for buying houses is competitive. This is because the potential buyer can back out of the sale due to something that is often beyond the seller's control.
• Longer sale process: Because contingencies add extra steps to the homebuying process, they can prolong the amount of time it takes to get you to closing.
• The deal potentially falling through: If conditions aren't met, the transaction could be terminated, and you'd have to start over.

Think about what makes sense for you and consult a real estate professional to help you decide.

Contingencies for Homebuying FAQs

Here are answers to some questions you may have when dealing with contingencies for homebuying.

Is a Home Contingency Clause the Same as a Contingent Listing?

No. Contingency clauses, which are part of an offer you make on a home, specify requirements that must be met for the transaction to proceed. A contingent listing refers to a specific way a property can be listed after an offer's been accepted, but the sale isn't finalized.

Can You Still Buy a House if It Says Contingent?

A home listed as “contingent” means the seller has accepted an offer, but some conditions need to be met to complete the sale. You can still make an offer on a contingent home since the existing offer could fall through if the buyer can't secure mortgage financing or if inspection problems arise.

Is It Better to Be Contingent or Pending?

For homebuyers, a “contingent” listing might be better than a “pending” listing, because contingent means there's still a chance to get the home if conditions aren't met. Pending indicates the process is further along, with a higher probability the sale will go through.

On the other hand, sellers may view pending as better because their home is closer to selling.

Final Thoughts on Homebuying Contingencies

Homebuying contingencies can help you make more confident decisions during the homebuying process and protect you from unexpected costs or other unpleasant surprises.

Whether you're ready to buy a home with or without contingencies, Freedom Mortgage can help you find the right loan for your needs. Get started today on the path to owning your dream home.