Common Contingencies When Buying a House

When purchasing a home, understanding the real estate contract is important. A contingency clause specifies a condition that must be met within a particular timeframe for the contract to become legally binding. These clauses function as protective measures, allowing the buyer or, in some cases, the seller, to terminate the contract without financial penalty if the specified conditions are not satisfied. They mitigate risks inherent in a real estate transaction.

Essential Home Buying Contingencies

A real estate contract often includes several types of contingencies, each designed to protect the buyer from specific risks. These clauses allow the buyer to withdraw from the purchase without forfeiting their earnest money deposit if certain conditions are not met.

An inspection contingency allows a buyer to have the property professionally examined for potential issues. This involves a licensed inspector assessing the home’s structural integrity, major systems like HVAC, plumbing, and electrical, and checking for concerns such as pests or radon. If the inspection reveals significant defects or safety concerns, the buyer can negotiate repairs, request a price reduction, or, if an agreement cannot be reached, cancel the contract and receive their earnest money. The timeframe for this contingency is about 7 to 10 days from the acceptance of the offer.

The appraisal contingency protects a buyer’s financial interests, particularly when a mortgage is involved. This clause makes the sale contingent on the property appraising for at least the agreed-upon purchase price. Lenders will not finance a home for more than its appraised value. If the appraisal comes in lower than the sales price, the buyer can renegotiate the purchase price, pay the difference in cash, or, if negotiations fail, withdraw from the contract and recover their earnest money.

A financing or loan contingency protects the buyer if they are unable to secure mortgage approval to complete the purchase. This clause specifies a window of time, often 30 to 60 days, for the buyer to obtain loan approval. If the buyer is denied a home loan or cannot meet the lender’s qualifications, this contingency allows them to terminate the contract without penalty and retain their earnest money. This provision also outlines specific loan terms, such as interest rate ceilings or loan amounts, that must be met.

For buyers who need to sell their current residence to fund a new home purchase, a sale of current home contingency is used. This clause stipulates that the new property purchase depends on the sale and closing of the buyer’s existing home within a specified timeframe. While this offers protection to the buyer, preventing them from carrying two mortgages, sellers may view such offers as less appealing due to uncertainty and potential delays. Some contracts may include a “kick-out clause,” allowing the seller to continue marketing the property and accept another offer if a more favorable one arises, giving the initial buyer a short period to remove their contingency.

A title contingency ensures the seller has clear legal ownership of the property and that there are no undisclosed liens, legal disputes, or other encumbrances that could affect the buyer’s ownership rights. Through a title search, the buyer can examine public records to verify the property’s marketable title. If issues such as unpaid taxes, judgments, or easements are discovered, the buyer can require the seller to resolve them before closing or, if unresolved, terminate the contract and receive their earnest money.

In some regions, an attorney review contingency is a standard part of the purchase agreement. This clause grants a period, typically three to five business days after contract acceptance, during which attorneys for both the buyer and seller can review and propose modifications. This period provides an opportunity for legal experts to ensure the contract aligns with their clients’ best interests and to identify any hidden clauses or unfavorable terms. If the attorneys cannot agree on proposed changes or advise against the contract, either party may cancel the agreement without penalty during this timeframe.

The Contingency Process

Contingencies are formally integrated into the real estate offer or purchase agreement, establishing specific conditions and deadlines that govern the transaction. These clauses are legally binding components that dictate how the deal proceeds. The inclusion of these terms, along with their respective timeframes, is outlined within the written contract.

Once an offer containing contingencies is accepted, the buyer must actively manage these conditions. There are two primary actions a buyer can take regarding a contingency: satisfying it or invoking it. Satisfying a contingency means the specified condition has been met, such as receiving a satisfactory home inspection report or obtaining full loan approval. This usually involves formal communication, often a signed waiver or notice of satisfaction, submitted to the seller within the stipulated timeframe.

Alternatively, a buyer might choose to waive a contingency, meaning they elect to proceed with the purchase without its protection. This can occur in competitive markets to make an offer more attractive, but it carries increased risk for the buyer. Waiving a contingency means accepting the property “as is” regarding that specific condition, potentially taking on unforeseen financial burdens.

If a contingency cannot be met or the results are unsatisfactory, the buyer may choose to invoke it. This formal action notifies the seller that a condition, such as an unsatisfactory inspection outcome or a low appraisal, has not been fulfilled. Invoking a contingency requires strict adherence to the deadlines outlined in the contract and must be communicated in writing. This written notification serves as a legal basis for the buyer to request renegotiation or, if necessary, terminate the contract without penalty.

Throughout this process, strict adherence to timelines and formal written communication is important. Each contingency clause in the contract will have a defined period, often ranging from a few days to several weeks, within which the buyer must complete the necessary actions and provide notification. Missing a deadline can result in the automatic waiver of a contingency, potentially obligating the buyer to proceed with the purchase even if the underlying condition remains unmet. Legal and financial consequences, including the potential forfeiture of earnest money, can arise from failing to follow these procedural requirements.

Resolving Contingency Issues

When a contingency is invoked due to an unmet condition, it initiates a negotiation phase between the buyer and seller. For instance, following a home inspection that uncovers issues, the buyer might request the seller to make specific repairs, offer a credit at closing, or agree to a reduction in the purchase price. If an appraisal comes in below the agreed-upon sale price, the buyer may propose a price adjustment. The seller has several options: accepting the buyer’s requests, issuing a counter-offer with alternative terms, or rejecting the requests entirely.

If the parties cannot reach a mutually acceptable resolution during negotiations, the contract may proceed to termination. An unmet contingency provides a legitimate reason for the buyer to withdraw from the purchase agreement without penalty. The process of terminating the contract involves formal written notice from the buyer to the seller, explicitly stating the reason for termination based on the specific contingency clause. This formal communication is important for ensuring the termination is legally valid.

In cases where a contract is terminated due to a validly exercised contingency, the earnest money deposit (EMD) is returned to the buyer. The earnest money, a good-faith deposit made by the buyer to demonstrate commitment, is held in an escrow account by a neutral third party. If the buyer properly invokes a contingency, such as a failed inspection or inability to secure financing, they are entitled to a full refund of this deposit.

However, the disposition of the earnest money changes if the buyer defaults on the contract for reasons not protected by a contingency. For example, if a buyer changes their mind about purchasing the home or fails to meet a contractual deadline without a valid reason, they may forfeit their earnest money to the seller. The terms of the purchase agreement, along with state and local regulations, govern the conditions under which earnest money may be forfeited or returned.