Most Home Purchase Agreements Are Contingent on These Two Items
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Richard Haddad Executive EditorRichard Haddad is the executive editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
When buying a home, you’ll need to sign a contract with the seller. Most purchase agreements are contingent on two key items: home inspection and financing. As a homebuyer, knowing what these contingencies mean for you and the seller can help you make decisions with more confidence and avoid unexpected surprises and pitfalls.
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What does contingent mean when buying a home?
In the world of real estate, a contingent offer on a home means that the purchase is conditional upon certain terms being met. These conditions, or contingencies, act as safeguards for both the buyer and seller. Essentially, they provide a way to back out of the sale if specific criteria aren’t fulfilled without facing penalties. This setup helps manage the risks associated with such a significant investment.
Most purchase agreements are contingent on which two items?
Among the various types of contingencies, two stand out in most home purchase agreements: home inspection and financing. These are the cornerstones that ensure the property meets your expectations and that you have the necessary funds to complete the purchase. Understanding these contingencies is crucial as they play a significant role in the homebuying process. They influence both your decision-making and whether you are able to close the sale on the home you want.
1. Home inspection contingency
This contingency allows you, as the buyer, to have the property professionally inspected within a specified timeframe. The purpose is to uncover any significant issues or defects in the home that could affect your decision to proceed with the purchase. These might include significant asbestos or mold issues, rotted columns, or other structural defects like a cracked foundation.
What does this mean to a buyer?
As a buyer, a home inspection contingency offers you a layer of protection. It ensures that you’re not walking into a costly surprise after the purchase. If the inspection reveals major problems, this contingency allows you to renegotiate the terms, request repairs, or even back out of the deal without losing your earnest money deposit.
What does this mean to a seller?
For the seller, this contingency can be a double-edged sword. While it can lead to a smoother transaction by addressing any concerns upfront, it also means the sale is not a done deal until the inspection is passed. Sellers may need to be prepared for possible renegotiations or repair requests based on the inspection findings.
2. Financing contingency
A financing contingency, also known as a mortgage contingency, is an agreement that the home purchase depends on your ability to secure a mortgage. This clause is often included in the purchase agreement to ensure that if you’re unable to obtain financing, you can legally withdraw from the deal without facing financial penalties.
What does this mean to a buyer?
For you as a buyer, the financing contingency is a safety net. It gives you a specified period to secure a mortgage loan. If you’re unsuccessful in obtaining financing within this time frame, you can back out of the contract without losing your earnest money deposit. This contingency reassures you that you won’t be legally obligated to complete a purchase you can’t afford.
What does this mean to a seller?
For the seller, a financing contingency means that the sale is conditional until your buyer financing is secured. While this offers the seller a degree of certainty that you are serious about the purchase, it also introduces an element of uncertainty. If you are unable to secure financing, the deal may fall through, and the seller will have to relist the property. This can result in a longer sales process and potential market uncertainties for
What other contingencies might come up when buying a home?
Besides the more common inspection and financing contingencies, there are other clauses you might encounter in a home purchase contract. These include the home sale and appraisal contingencies. Each of these contingencies can provide specific protections for you in the homebuying process, but they can also come with challenges.
Home sale contingency
This contingency links the purchase of the new home to the successful sale of your current home. It’s particularly relevant if you’re relying on the sale proceeds as a significant part of your new home’s down payment.
What does this mean to a buyer?
For you as a buyer, a home sale contingency offers financial protection. It ensures you’re not legally bound to buy a new home before selling your current one, safeguarding you from owning two properties at once or facing financial strain for two mortgage payments. It’s a strategic move if you need the funds from your current home to finance the new one.
What does this mean to a seller?
For sellers, the home sale contingency can be risky. It introduces uncertainty, as the sale depends on another transaction outside their control. If your home doesn’t sell within the agreed period, the deal could fall through, leaving the seller to restart the selling process.
Appraisal contingency
An appraisal contingency ensures that the home’s value, as determined by a professional appraiser, meets or exceeds the agreed-upon sale price.
What does this mean to a buyer?
For you, this contingency is a safeguard against overpaying. If the appraisal comes in lower than the sale price, you have the option to renegotiate the price, make up the difference, or walk away from the deal with your deposit. You will, however, still need to pay the cost of the appraisal. This clause can play a vital role in ensuring that your investment aligns with the home’s true market value.
What does this mean to a seller?
For the seller, an appraisal contingency adds another layer of uncertainty. A low appraisal can lead to renegotiations or even the collapse of the sale. It can be a nerve-wracking part of the process as they await confirmation that their home’s appraised value aligns with the agreed sale price.
Buyer planning tip: In a competitive housing market, the details of your offer can be the deciding factor in its acceptance. Too many contingencies, particularly a home sale contingency, can make your offer less appealing to sellers. They often prefer straightforward deals with fewer potential hurdles. Before finalizing your offer, consult with a top real estate agent. An experienced agent can help you determine which contingencies are essential for your protection and which ones you might be able to forgo.
What can I do to avoid contingencies in my purchase offer?
Reducing or avoiding contingencies can make your offer more attractive to sellers, especially in competitive markets. However, doing so requires careful planning and a clear understanding of your financial situation.
One way to minimize contingencies is to secure your financing in advance (mortgage preapproval) or demonstrate significant financial backing. This shows sellers that you’re a serious buyer with the means to follow through on the purchase.
Additionally, consider HomeLight’s innovative “Buy Before You Sell” program. This unique option allows you to unlock the equity in your current home, giving you the funds to make a strong, non-contingent offer on your new home before selling your old one. This program can be a game-changer, particularly for buyers in fast-paced markets or those needing to align their buying and selling timelines.
Here’s how HomeLight Buy Before You Sell works:
»Contact HomeLight or ask your agent how HomeLight Buy Before You Sell can facilitate a smoother, contingency-free purchase experience.
Partner with an expert to get the home you want
Buying a home can feel like a complex process. From understanding contingencies to making a competitive offer, it can be overwhelming. What’s more, the language in a purchase agreement can be confusing and present potential pitfalls.
A knowledgeable agent can guide you through each step, ensuring that your interests are protected and your offer stands out.
HomeLight can connect you with top real estate agents in your area. These professionals have the experience and insights needed to navigate the market effectively. Whether you’re dealing with contingencies, negotiating terms, or simply seeking the right home for your family, having an expert by your side can make all the difference.
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