Last year 5.34 million existing homes were sold. That is 445,000 sold every month. Not every one of these closings is simple and easy, though.
For some, the buyers and sellers agree to special terms. These special terms help protect both the buyer and seller from agreeing to a deal that wouldn’t be desirable.
Are you thinking about buying a house on a contingency? Keep reading, so you go into your agreement prepared.
What Is a Contingency?
When a buyer makes an offer on a piece of property, and the seller accepts it, the two parties have a contract for the sale of a property. However, there are facts about the property that are unknown to the parties, so clauses called contingencies are included.
These special terms are criteria that need to be met before the sale can be complete. Typically, there are three main categories that contingencies fall into: home inspection, mortgage approval, and appraisal.
Your contingency doesn’t have to fall into these categories though. As long as the other party agrees, you can include any contingency you wish as long as it doesn’t violate any law.
Home Inspection Contingencies
These contingencies are the most important for buyers. It gives them the ability to have the home professionally inspected before they have to put down money.
If the inspector finds something wrong with the home, the buyers can use these contingencies to either demand that it be fixed, reduce the sale price, or back out of the deal entirely.
As a buyer, this contingency is a must for any property sale contract you sign.
Mortgage Approval Contingency
No one wants someone to agree to a contract if they don’t have the money to back it up. This contingency protects both the buyer and seller from agreeing to a deal where the buyer can’t follow through.
With this contingency in place, the buyer has a specific amount of time to get their mortgage approval. If the buyer can’t get a lender to commit to lending them money, then they can walk away from the deal.
Smart buyers streamline this process by securing their money in advance. This way, they walk in to give an offer with approval already in hand.
In a hot market, you may be tempted to waive this contingency. If you do this, you risk losing your deposit that is in escrow when you ultimately walk away from the deal.
In a seller’s market, many buyers get tempted to waive this contingency. However, this isn’t wise as mortgage lenders will only put up so much money. This amount is based on the appraisal, not your offer amount.
The appraisal contingency has a third party to evaluate the market value of the home. The mortgage lender hires this appraiser.
If the appraiser finds that the value of the home is lower than the offer, then the buyer can back out of the deal. This ensures that the buyers don’t grossly overpay for the property.
However, not all buyers will want to back out simply because the appraisal came in low. If the market is hot, and the buyer really wants the home, they will pay more.
The catch is that the buyer will have to come up with the difference between what the lender is willing to hand over and the initial offer.
There are few other contingencies that buyers can ask for, but sellers don’t have to agree. In a hot market, you are less likely to get a seller to accept. When there are multiple offers on the table, the seller has the option to go with a more attractive offer that doesn’t have as many restrictions.
As the buyer, you can ask the seller to include contingencies about the sale of your home, homeowners insurance, or homeowners associations.
If you already own a home and need the proceeds from that sale, you can make the current purchase offer contingent on the sale of your home. Even if your home is in escrow, you should still ask for this contingency. After all, sales do fall through.
To be able to obtain your loan, you will have to purchase homeowner’s insurance. However, you may find that the coverage is cost prohibitive of you buying the home. This contingency will protect you if you find that the insurance is more than you can afford.
When it comes to homeowner’s contingencies, make sure that these are truly restrictive rules. Only the most desperate of sellers are going to be willing to deal with these hang-ups. After all, are you going to not buy your dream home because the HOA only allows specific paint colors?
What If a Contingency Is Included in the Listing?
Sellers will continue to have their home listed despite having agreed to a contract for sale with a potential buyer. What this means for you is that there is already a contract on the table for the home, but contingencies are holding up the deal.
If you find a home at this stage, you are probably too late to make an offer. However, never say never.
Your best course of action in this situation is to consult with a real estate agent. They can look up the property on the MLS and find out more details on the home and pending contract.
Now You Know About Buying a House on a Contingency
You are now ready to make an offer on your next home! Knowing about buying a house on a contingency is a useful tool for protecting yourself when making an offer.
Remember though; the seller doesn’t have to agree to them. Depending on how competitive the market is will influence how likely the seller is to accept your term.
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