Here are 5 of the most common homebuying contingencies that you need to be aware of before you sign a purchase contract on your new home.

What are homebuying Contingencies?

In today’s red-hot real estate market, it is common for multiple offers to be made for one property.  In such cases, the seller will review all offers and decide which offer is best. The seller will undoubtedly choose the offer with the highest price AND the best chance to close in the shortest amount of time.

To get the winning bid, buyers have resorted to waiving homebuying contingencies.  A contingency is a condition which must be met before the buyer will proceed with the sale.

Despite a realtor’s best efforts, there are contingencies that arise in the homebuying process that can derail the most carefully crafted sales contract.  What are these contingencies?  Is it a good idea to waive them?  Here are the most common contingencies with methods to address them.

financing

A buyer must present a preapproval letter from a lender as proof that the buyer is able to obtain a mortgage.  Unfortunately, a preapproval does not always lead to an actual approval.  This can occur if the buyer lost their job or the buyer’s credit score fell below an acceptable level.  In this case, the sales contract would be cancelled.

Appraisal

An appraisal is an estimate of the value of a property.  It is based on the property’s characteristics and the value of similar properties that recently sold in the immediate area. A property’s characteristics include its location, its square footage and whether the rooms were recently renovated.

Mortgage lenders use appraisals to determine if the seller’s asking price is appropriate.  As previously stated, houses are selling FAST in most areas with multiple offers being submitted. Buyers have responded by engaging in bidding wars where they offer more than the asking price, sometimes thousands more.

If the buyer will be obtaining a mortgage, there is a serious risk that the lender will not agree to the higher price.  When this happens, the buyer will have to pay the additional money from their own funds or try to renegotiate the sale price otherwise, the house will not close.

home Inspection

A home inspection is one of the most important protections for a homebuyer.  The buyer is responsible for selecting a home inspector to look over the subject property.  The purpose of this inspection is to find flaws that would become the buyer’s responsibility after closing.

Major flaws would include structural issues, mold or major plumbing problems and could cost thousands to remediate.  Armed with this knowledge, the buyer can decide if they want to proceed with the sale.

The buyer can request seller concessions in the form of a credit for the estimated cost of the repairs at closing.  Conversely, the seller could agree to make the repairs prior to closing.

kick-Out Clause

Sometimes the buyer with the winning bid must sell an existing property in order to purchase the new property.  This situation can be addressed with a kick-out clause which allows the buyer a specific amount of time to sell their home.

This time, called the “home sale contingency period”, may be 30-90 days.  During the home sale contingency period, the buyer works at closing on the buyer’s home while the seller can continue marketing the seller’s house for sale.  If a second buyer is found, the seller could possibly “kick-out” the first buyer.

After being notified of the new offer, the first buyer has 72 hours to match the new offer and proceed with the sale or the buyer can cancel the contract.  Though this practice may seem harsh, it can benefit the buyer.  The buyer has the peace of mind of being able to cancel the contract if the buyer’s home isn’t sold.

Title

A title search on the subject property will be done by a title company or a real estate attorney.  The title is a record of homeownership and is an essential part of the homebuying transaction.  Problems can arise from disputes about the rightful owner or unpaid liens and judgements.

These problems could be a major headache for the purchaser if they are not resolved prior to closing.  Fortunately, most title issues can be easily resolved, but in the case where a solution isn’t possible, the purchaser can decide to terminate the contract of sale.

Homebuying Contingency Checklist

Homebuyer contingencies are included in sales contracts to avoid serious issues.  These clauses enable buyers to acquire properties on the best terms and provide the ability to cancel if troubles arise.  Despite the temptation of winning a bidding war on a desired property, homebuyers should be cautious.

Waiving buyer protections is usually a bad idea.  Buyers should realize that a home is often the most expensive purchase that they will make.  Deals of this magnitude should be executed with care.  Always keep a cool head.