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Buying a Home? Here’s Everything You Need to Know About Buying a House on Contingency

Analysts expect 5.25 million existing homes to go on sale by the end of 2019.  

The housing market is heating up, and although it hasn’t crept back to its 2005 high, more existing homes have gone on sale in recent years. You can now buy a house conventionally or even without having to sell your old house first. 

Since home buying is fraught with risk, you need to protect yourself. Buying a house on contingency ensures you can back out of your purchase if necessary. Here is a deeper look at what contingencies are and how they can help protect you. 

What does “contingent” mean in real estate?

A contingency, in real estate, is a condition a buyer or seller makes for the purchase of a home.

From the buyer’s perspective many of the common contingencies are meant to safeguard against the many things you still don’t know about the house at the time of making an offer. When you see a house you want to buy and make an offer to the seller, if they accept it, then you both enter into a contract for the sale of a property.

As part of the process of making the offer, you will be required to put up earnest money. Earnest money is cash you put up to show that you are making an offer to buy a house in good faith. It is kept in an escrow account by the broker, and if the purchase goes through, it goes towards the purchase price. 

Since you already put skin in the game via earnest money when making an offer to buy a house, you have to protect yourself from potential liabilities that may tank the deal. Thus, a contingency is a condition you place on the agreement that has to be met before the sale can go through. If it’s not met, you can back out of the deal. 

Common home buying contingencies

Three of the most common types of home buying contingencies are the home inspection, mortgage, and appraisal contingencies. When you want to add a contingency to your purchase contract with the seller, it will likely fall into one of these three categories. 

As long as you and the seller agree on the conditions you want, and they are legal, then there should not be any problem.

Here are three common types of home buying contingencies. 

1. Home inspection contingency

A home inspection is critical in ensuring you acquire property that doesn’t put you in a financial hole due to undisclosed issues. Essentially, a home inspection contingency will earn you the right to get the property inspected as soon as you deliver your earnest money. 

For example, if you are buying a home and ask the seller to fix the windows, you might discover that mold has been growing under the framework. With this new information, you can negotiate with the seller to either cover the costs of fixing this issue or to lower the purchase price. If you aren’t satisfied with the solution, you can back out of the deal. 

Any home buyer should treat an inspection contingency as a must-have in the purchase contract. Thus, it is not a good idea to waive it. When you waive it, you lose the ability to request something to be fixed or to renegotiate the price when you find out repairs are needed. 

2. Appraisal contingency

An appraisal is where the lender brings in a third-party to assess the fair market value of the home you are buying. An appraisal is required by most lenders and the valuation typically needs to come in at or below your offer price. If it doesn’t you may have to put extra money down in order to qualify for the loan. 

In the event the appraised value of the property turns out to be lower than the price you agreed to buy it for, you have the wiggle room to back out.

When it’s a seller’s market, and you see a house that is an excellent value to you, there’s often a temptation to remove the appraisal contingency from your purchase contract. However, you should resist this impulse because you may not be able to qualify for your mortgage loan if the appraisal comes in low. 

RELATED: Considerations for Buying a Home in a Buyer’s or Seller’s Market

Let’s say your lender has agreed to loan you 90% of the appraised value of a house, and you’ll be making a 10% down payment to cover the difference. You then find a home going for $500,000, make an offer for that amount, and the seller accepts it. If it only appraises for $480,000, the lender will only loan you 90% of that, or $432,000. You’ll now have to put $68,000 down, which is $18,000 more than the $50,000 you would need to put down if the home appraised at your purchase price. 

3. Mortgage contingency

When you sign a contract to buy a home, but don’t yet have financing, it’s important that you add a “mortgage contingency” to your purchase contract. This ensures that, if your financing falls through, you can back out of the deal. If you can’t secure your mortgage loan by the closing date you and the seller agreed to, then you can negotiate for more time to get the loan, or you can back out of the deal entirely and keep your earnest money deposit.   

To improve the likelihood that you’ll get financing,  you should get a mortgage pre-approval from your lender before you make an offer on a house. This way, you won’t end up wasting your time or the seller’s. 

In a hot housing market, you (or the seller) can be tempted to forego a mortgage contingency. Avoid the temptation to waive this contingency because should your lender delay the loan or outright deny you, you might lose your escrow deposit. 

Protect Yourself

Buying a home is a significant milestone, and as such, you need to protect yourself from unforeseen risks. Buying a house on contingency gives you the chance to remedy any issues that come up or walk away from a sale altogether when necessary. 

Here at Homeward we are passionate about helping you buy a new home stress-free. When you use our service, we help you to make an all cash offer on your next home before selling your current one and safely remove the financing and home sale contingencies from your offer.  Get started with our application or see how Homeward works to learn how you can purchase your dream home without having to sell your old one first. 

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