Do you know what types of offers make sellers jump for joy? How about contingencies that make them nervous enough to say no? Offers with contingencies are sometimes necessary, but not all contingencies are created equal. If you’re about to submit an offer on your dream home and you’re not sure how many contingencies is too many, and which contingencies could send up red flags, you’re decreasing your chance of winning that house.
Although there are many contingencies to consider, we’ve outlined the most important below to help you strengthen your offer and avoid some common pitfalls.
1) Mortgage/Financing Contingency
Submitting a contract offer with a financing contingency is common. Most homebuyers have their monies tied up in their current home, making it unlikely they could make a cash offer on a new one. Although all-cash offers are king, if you need to add a mortgage contingency to your new home contract, it shouldn’t signal any red flags to the seller.
When you add a mortgage contingency, it means that your purchase of the new home is contingent upon your securing financing from a lender. This usually starts with the buyer acquiring a pre-approval letter from the lender to provide to the seller that states the buyer is likely to get a mortgage with that lender. If the buyer can’t get the mortgage, then the financing contingency allows the home purchase to be cancelled.
This contingency protects buyers from completing a home sale without the proper funds, and in some states, avoids a potential lawsuit from the seller based on the contract falling through due to failed financing. It can also let buyers get their earnest money back (typically 1 to 5 percent of the purchase price) if the deal falls through.
If you’re in a buyer’s market, sellers are more flexible with contingencies like this; however, if you’re in a seller’s market, you could be up against more competitive offers like all cash where the buyer doesn’t need to secure financing.
Even though mortgage contingent-offers don’t throw up any red flags, it’s important to remember all-cash offers are 2 times more likely to beat out financed offers, plus they can command a 2 to 5 percent discount on the home price from the seller. If you don’t have enough funds, you can still remove a financing contingency by working with a company like Homeward where buyers can submit all-cash offers that are mortgage contingency free.
2) Appraisal Contingency
One of the most common contingencies, appraisal contingencies state that the sale of the home is contingent upon a third-party appraiser confirming the home is priced at fair-market value. If you’re submitting an offer with a mortgage contingency, your lender will definitely want an appraisal contingency in the contract to ensure they’re not loaning you more than what the home is worth.
When a home appraises for less than the sale price, buyers can either wiggle out of the contract, or negotiate the sale price and/or repairs with sellers. But if the seller won’t come down on price and the lender won’t provide additional financing, buyers who want to continue the transaction will have to pay the difference between the appraised value and the home’s list price.
This type of contingency protects buyers from overpriced homes, and due to most buyers needing to obtain financing to purchase new homes, adding this contingency to your contract usually doesn’t faze sellers.
3) Home Sale Contingency
Need to sell your current home before purchasing a new one? Writing this into the contract for your new home creates a home sale contingency. It explains that the buyer will purchase the seller’s home only if the buyer’s current home sells first. In other words, the sale of your new home is contingent upon the selling of your existing home.
If your existing home doesn’t sell within a certain time period, your contract with the seller could be cancelled. Because it’s hard to judge when your current home will sell and this type of contingency creates an easy out for buyers, home sale contingencies have little appeal to sellers.
Complications can easily arise with this contingency, and from the seller’s point of view, home sale-contingent offers are the weakest on the table. Up against all-cash, large down payments, or strong pre-approval letters from lenders, contracts that come tied to home sales typically fall to the wayside.
However, for buyers who need to sell their current home in order to buy a new one but want to avoid this contingency, there are alternate solutions such as Homeward. Homeward gives qualified homeowners the funds to make an all-cash offer with no contingencies. They can buy the home they want first, then pay rent on the new home while they take the time to sell their current one. Once they sell their current home, they get a mortgage to buy the new home back from Homeward.
The all-cash offer looks fantastic to sellers, and buyers get to nail down a dream abode without agonizing over selling their existing home beforehand.
4) Home Inspection Contingency
When you’ve included a home inspection contingency that means buyers have the right to have the home professionally inspected for issues. If anything emerges, buyers can void the home sale contract without losing their earnest money, or if they want to continue, they can negotiate with sellers to lower the sale price or pay for repairs.
Because waiving a home inspection contingency is rare, including it in your contract shouldn’t deter sellers from choosing your offer. And as a buyer, you want to know if there’s any surprises like a failing HVAC unit or a roof that needs to be replaced. This protects buyers from purchasing homes with major issues and provides a key negotiation point to persuade sellers to work with you on sale price and repairs.
About to make an offer on a new home, but don’t want a red flag contract riddled with contingencies? View how Homeward works to see if it’s a fit for your home purchase.
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