Most Purchase Agreements Are Contingent on Which Two Items?

A purchase agreement serves as a legally binding contract outlining the terms and conditions between a buyer and a seller for the transfer of property, most commonly real estate. This document details the agreed-upon price, property description, and other stipulations that must be fulfilled before the transaction can be finalized. Within these agreements, “contingencies” or “conditions” are clauses that provide specific protections for both parties, allowing them to withdraw from the contract without penalty if certain criteria are not met. These conditions ensure that unforeseen circumstances do not obligate either party to a disadvantageous deal.

Securing Financing

One fundamental condition frequently included in a purchase agreement is the financing contingency, which makes the entire transaction dependent on the buyer successfully obtaining a loan. This clause typically specifies a timeframe, often 30 to 60 days from the contract’s effective date, within which the buyer must secure a loan commitment. The contingency usually outlines the type of loan (e.g., conventional, FHA, VA), the maximum interest rate, and the loan-to-value ratio the buyer is seeking. Without this protection, a buyer could be contractually bound to purchase a property even if they are unable to secure the necessary funds.

If the buyer is denied financing or cannot meet the lender’s requirements within the agreed-upon period, they typically have the right to terminate the purchase agreement. This allows the buyer to recover any earnest money deposit they may have provided, preventing potential financial hardship. Conversely, if the buyer fails to notify the seller of their inability to secure financing by the deadline, they may forfeit their right to terminate and could be in breach of contract.

This contingency is crucial for buyers because it mitigates the risk of being unable to fulfill their financial obligations. It provides a safety net, ensuring they are not forced into a purchase they cannot afford. For sellers, it offers a degree of assurance that the buyer is actively pursuing financing, though it also means the sale is not final until the loan is secured. The specific terms of this contingency are often negotiated and can vary based on market conditions and the buyer’s financial strength.

Property Condition Review

Another significant condition often present in purchase agreements is the property condition review, commonly known as the inspection contingency. This clause grants the buyer the right to have the property professionally inspected for any material defects or issues within a specified timeframe, typically ranging from 7 to 14 days after the contract is signed. An inspector examines various components, including structural elements, roofing, plumbing, electrical systems, and HVAC.

Upon completion of the inspection, the inspector provides a detailed report outlining any deficiencies, safety concerns, or necessary repairs. Based on these findings, the buyer typically has several options: they can accept the property as is, request the seller to make specific repairs, ask for a credit at closing to cover repair costs, or negotiate a reduction in the purchase price. The buyer is generally expected to submit a formal request for repairs or concessions to the seller within the contingency period.

If significant issues are discovered and the buyer and seller cannot reach an agreement on how to address them, the inspection contingency allows the buyer to terminate the purchase agreement. This protects the buyer from unknowingly purchasing a property that requires substantial, unforeseen repairs. Without this clause, a buyer could be legally obligated to proceed with the purchase, even if the property has hidden structural damage or other costly problems.

Additional Common Conditions

Beyond financing and property condition, other contingencies may be included in a purchase agreement to address specific circumstances. An appraisal contingency, for example, makes the sale dependent on the property appraising at or above the agreed-upon purchase price. If the appraisal comes in low, the buyer can renegotiate the price or terminate the contract.

A home sale contingency is sometimes included when a buyer needs to sell their current residence before they can purchase a new one. This clause allows the buyer to terminate the agreement if their existing home does not sell by a specified date. While beneficial for the buyer, sellers often view this contingency less favorably due to the added uncertainty it introduces.

Furthermore, a title contingency ensures that the seller can convey clear title to the property. A title search is conducted to verify this, and if any issues are found, the seller is typically given time to resolve them. If the seller cannot clear the title, the buyer can usually withdraw from the agreement without penalty.