What is “contingent” in real estate? You’ve probably seen this word when shopping online for houses or maybe even driving by real estate signs in front yards. A contingency clause in real estate spells out a condition or action that must be met before the contract becomes final. It becomes part of the contract when both the buyer and the seller agree to the terms of the contract and sign it. If a contingency is included in your real estate contract, you’ll want to know the ins and outs.
Typically, there are three main categories for contingencies – appraisal, mortgage approval, and home inspection. Here we’ll go over these three contingency clauses in home purchase contracts that you’ll see most often, and we’ll explain how they can benefit both parties.
An Answer To: What is “Contingent” in Real Estate?
When it comes to answering the question “What is contingent in real estate?” you’ll want to know what you’re getting into, especially if you’re just starting the home buying process. Let’s go over the most general ones.
Appraisal Contingency
One of the most common contingencies is an appraisal contingency. This type of criteria helps protect the buyer and makes sure that the property you want is valued at a minimum specified amount. This means that if the property does not appraise for at least that amount, the contract can be terminated and usually earnest money is refunded to the potential buyer. Sometimes the contingency will include terms that permit the buyer to proceed with the purchase of the house, even if the appraisal is below the amount. Usually this comes with a timeline of a set amount of days the buyer can proceed after they receive the appraisal value.
It also typically gives the seller an opportunity to lower the price to the appraisal amount. The language in the contingency will specify a release date that the buyer MUST notify the seller of any issues with the appraisal – otherwise the buyer will not be able to back out of the transaction.
In simpler terms, for this type of real estate contingency, a third party is hired (usually by the mortgage lender) and evaluates the fair-market value of the property you’re interested in. If the appraised value is less than the sale price, the appraisal contingency lets you back out of the deal. No one wants to overpay, and this type of criteria ensures you get to back out. Sometimes when the market is hot, buyers can feel pressured to waive this contingency. We don’t recommend this, as lenders will only give a certain amount of money for the appraised value of the home, and the buyer might have to split the difference if the asking price is more.
Mortgage Approval Contingency
To answer the question “What is contingent in real estate,” we have to cover mortgage approval contingencies, also called a financing contingency. This allows the buyer time to apply for and get approved for financing for the purchase of the home in question. Real estate agents who are helping first time home buyers will push for this contingency, as it provides protection for the buyer. They can back out of the contract and reclaim their earnest money if they are unable to secure money from a mortgage broker, bank or any other lending avenue.
The criteria will specify a certain number of days the buyer has to obtain the proper financing. As a buyer, you will have until that specific day to terminate the contract or request an extension or else you will be obligated to purchase the property – even if you don’t have the loan!
We definitely recommend speeding this process along by getting pre-approved. Before you even start shopping for your home, talk to a mortgage broker and start the process. You’ll save yourself and the sellers time and you’ll feel at peace knowing what you can and cannot afford. Often times the time it takes to find a loan can be months, and you don’t want to miss the opportunity to buy your dream house.
Home Inspection Contingency
We think that when it comes to what is contingent in real estate, a home inspection contingency might be the most important. This gives buyers the right to have their potential new home professionally inspected after paying their earnest money. The final transaction typically hinges on this contingency – the contingent offers allows the buyer to request fixes and potentially renegotiate the price, or back out of the sale altogether. A home inspection is pretty much-have when it comes to any real estate contract.
A good inspection will give you a better idea of what to expect with your potential home, and bring up any issues it currently has. Sometimes sellers aren’t even aware of potential issues, and a home inspection will reveal everything you need to know, and help you make negotiations with the seller if needed. Your real estate agent will be able to help you navigate through what to worry about with a home inspection and make sure both parties are getting their needs met.
Bonus: Home Sale Contingency
Another contingency that should be considered as we answer the questions “What is contingent in real estate” is a home sale contingency. In most cases, buyers will sell their house before buying a new one, but sometimes the timing and financing don’t work out the way they intended. Which is why a home sale contingency comes into play. This type of contingency gives the buyer a specified amount of time to sell their existing home in order to finance the new one. This can protect the buyer because if their home doesn’t sell for at least the asking price, they can back out of the transaction without legal consequences.
However, these types of contingencies are difficult on the seller because they might be forced to pass up another offer while waiting for the contingency sale date to end.
What is Contingent in Real Estate? Bottom Line
Buying a house is probably the biggest financial decision you’ll ever make. When you enter into a real estate contract, you are entering into a legally enforceable agreement that defines the obligations of each party in the transaction. The above contingencies are clauses attached to the contract. Make sure you thoroughly read and understand your contract, and pay specific attention to all dates and deadlines. Even one missed deadline can have a costly effect on the entire transaction.
At the end of the day, when you work with qualified real estate professionals like Harbor Realty, we’ll be able to guide you through the entire home buying process. They’ll make sure that each document is prepared correctly and explain the contingency clauses to you. Give us a call today and let us help you find the right house for you, and discuss what is best for you, based on your needs and finances.
