The prospect of buying and moving into a new home is exciting — you envision how you’ll live within the space and use it day-to-day — but it also comes with a significant financial commitment. From the initial down payment to inspection costs to your eventual mortgage, ensuring your financial security is of critical importance.
Protecting your investments in the homebuying process can be challenging. In some cases, contingencies can help protect buyers by providing a way out of a home purchase agreement in certain situations. It won’t always be the right solution, but understanding what contingencies can and can’t do can help you be more prepared for your home search.
What does contingent mean in real estate?
In many ways, the meaning of contingent in real estate isn’t that different from its general definition: When something is dependent on something else happening. (Like a weekend picnic might be contingent on there being no rain.)
In real estate, a contingency means that a property sale will only go through once certain criteria are met. For example, a contract may be contingent upon a roof replacement or a home inspection.
Why are contingencies important in real estate?
Contingencies exist within purchase agreements to protect buyers and sellers. They help to protect both parties by providing a way to back out of the purchase contract if either side’s requirements are not met.
Bear in mind, that while contingencies can help protect yourself and your financial needs when buying a home, they can be risky and reduce your chances of having your offer accepted or closing on the home you want — especially in volatile, competitive markets.
Contingent vs. pending home listings
Another related term often seen in real estate when an offer has been made is a “pending sale.” This is not the same thing as a contingency. A property marked as contingent is under contract, but specified conditions need to be met before the sale is final.
A pending sale can mean either an offer was submitted without contingencies or any contingencies originally included were removed — and all that needs to be done is thefinal closing. When a property is contingent (assuming any issues are resolved), it will not move to the pending stage until closing documentation is completed.
Types of real estate contingencies
Just like the properties they’re placed on, contingencies can come in all shapes and sizes. Understanding each of them can help you be better prepared for the homebuying process from start to finish.
A mortgage contingency protects buyers who know they’ll need financing to close on a home and aren’t sure they’ll qualify for a loan. It provides a contingency period — typically 30 to 60 days — for buyers to secure financing with a lender. If financing is secured, the deal can move forward. If the buyer hasn’t been pre-qualified or pre-approved or their finances have changed, they can back out of the deal without penalty and will get their earnest money back.
Appraisals are a common step in the homebuying process to assess the value of the property. An appraisal contingency protects you if a home is appraised for less than the purchase price. Without it, you may have to have a second appraisal or negotiate for a lower price. An appraisal contingency lets you exit the contract penalty-free and is typically recommended for buyers using financing or purchasing a home in an area with fluctuating and unpredictable home prices.
By including an inspection contingency in your purchase agreement, you’ll have seven to 10 days to respond to any findings that need to be addressed. Ideally, there will be little to no damage or issues. Minor repairs are usually relatively easy to sort out between buyers and sellers, but major repairs may require more intense negotiation. If you can’t come to an agreement, the inspection contingency clause allows you to terminate the contract.
Home sale contingency
If you already own a home and want to sell it before closing on a new one, a home sale contingency is a great option. This contingency clause provides a specific date by which you must sell your home — and if you are unable to do so, you can exit the new purchase contract and will get your earnest money back. Keep in mind this contingency could be seen as an obstacle for sellers. You may find yourself in a bidding war with another buyer or have your offer rejected right away. As an alternative, you can request a later close date to give you more time to sell your home.
This option gives buyers the option to leave the sale of the home if there is any contested ownership, easement issues (someone else has legal right to use the property), or mortgage liens (someone else has a financial claim to the property until a debt is paid). Before closing, you, a title company or an attorney can perform a title search, which will identify such issues and allow you to resolve them or look for a different home.
Protect your homebuying process
As you embark on your homebuying experience, there’s a lot to be excited about. Keep these contingency protections in mind to help safeguard your investment and keep you on track to your new home.