When making a purchase offer on a home, it's important to keep the circumstances enticing while simultaneously creating a safety net for yourself. Maintaining a strong stance while establishing clear boundaries can help make sure the deal moves smoothly and favorably.
In real estate, a “contingency” is a condition stipulated in the purchase agreement (or purchase offer) that lays out the conditions of the sale and protects either the buyer or seller from certain unfavorable circumstances. There are contingencies for financing, inspection, and other important stages in the purchase of a home.
If you’re thinking about buying a home, let’s look at a few of the most common contingencies you may want to consider.
An appraisal looks at the market value of the home compared to neighboring properties that have recently sold. This is a definite necessity to include in your contracts, protecting you in multiple scenarios. Appraisal contingencies
guarantee your ability to back out of the contract if the appraisal does not come back in your favor.
Mortgage companies can only grant loan amounts up to the fair market value as per the appraisal. Without a contingency in place, if the appraisal is less than the loan amount, the buyer is responsible for making up the difference. With this contingency, the buyer can renegotiate the sales price with the seller to try to minimize or eliminate the difference between the purchase and appraisal price.
Due Diligence Contingency
Due diligence is the process of taking responsible measures during the buying process. A due diligence contingency basically sets a specific time period in which the buyer can terminate the business transaction regardless of reason. So, if you discover some undesired information about the property, you are no longer obligated to move forward. It is best to make this time period encompass all inspections and do thorough research on the property
so you can feel confident you’ve learned everything you need to know to move forward.
Loan Approval Contingency
Going to the bank and seeking a pre-approval letter from your mortgage lender is just the first step in securing your loan. There are a number of other details that have to fall into place before you get to the closing table. A loan approval contingency (sometimes called a “financing contingency”) simply states that the buyer has a certain number of days to get their financing worked out before they’re contractually bound to purchase the home.
As long as it’s within the time period specified by the contingency, you’ll be able to walk away from the deal in the event that your financing falls through. It’s always wise to speak with your lender to determine how long they need to get the mortgage approved so you can align the contingency time-frame.
An inspection contingency gives the buyer a certain time period to conduct all of their inspections. This often runs parallel to the due diligence period. If something comes up during the inspection that is not favorable or that changes the buyer’s desired purchase price, the inspection contingency allows for a renegotiation of price or terms.
Keep in mind that basic home inspections only cover interiors, exteriors, and general systems. It’s always wise to take inspections a step further by including specific detail-based inspections
into the contingency for items such as mold and insects. With this contingency, even if the seller won't cooperate and you feel the property requires too much work, you can cancel the deal without consequence.
Stay protected, secured, and insured. Don't fall into disagreeable circumstances from an unexpected occurrence during the contracting process. If you need help covering all your bases, contact us