Contingencies

1. An appraisal contingency is a clause in the contract that allows the buyer to back out of the contract if the home’s appraised value is lower than the purchase price. The lender will base the loan amount on the lesser of the purchase price and the appraised value. If a borrower is putting the minimum down payment into the transaction, the loan amount will be reduced, and to close the escrow at the agreed upon purchase price, the borrower would need to make up the difference in cash. If the borrower is putting more down more than the minimum lender requirement, a lower appraised value may change the loan to value ratio of the loan, thus possibly impacting the pricing and/or need for private mortgage insurance. A detailed discussion with your loan officer on this topic is important to strategically position your offer.
   
2. An inspection contingency is a clause in the contract that allows the buyer to back out of the contract if significant issues are discovered during the inspection process. A trained and certified home inspector will look for issues with the structure and home systems (like plumbing, electrical, and HVAC) that may not be obvious to the buyer. When you purchase a house that ends up in need of a major repair, you could take a significant financial hit. The inspection contingency can protect you from purchasing a poor property investment because it allows you to back out if a major issue is discovered.
   
3. A loan approval contingency is a clause in the contract that allows the buyer to back out of the contract if they are unable to secure financing for the home. Proper up-front work performed in concert with the loan officer and underwriter can minimize the exposure on this front as pertinent information and documentation should be provided and a decision made prior to even entering into contract.
   
4. A home sale contingency is a clause in the contract that allows the buyer to back out of the deal if they are unable to sell their current home. This contingency is common for buyers who need the equity from the sale of their current home to purchase the next one, usually going toward the down payment and closing costs. Even if you have funds available for a downpayment, not every homebuyer can afford to pay two mortgages while waiting to sell their current home. This gives buyers the option to back out of the contract if they cannot sell their current home by a specified date. Innovative loan programs called Bridge Loans¹ are available to allow borrowers to use the equity in their current home to finance and close on their new residence before closing on the sale of their current home.
   

While contingencies are put into place to protect homebuyers from unexpected events, these contingencies can leave a seller uneasy as to the strength of the buyer and their offer.Real estate markets vary and may dictate doing more upfront work to make a buyer’s offer more appealing, and oftentimes, these contingencies may need to be addressed.

It’s important to note that contingencies can vary depending on state laws and local customs. Be sure to consult with your real estate agent and loan officer for more information on contingencies in your area.

¹ See Bridge Loans (Coming: 8/14/24)