When you’re buying a home, it’s common practice to include “contingencies” in your sales contract. These are conditions that need to occur for your purchase to move forward. Many different contingencies can be included depending on your unique situation. Let’s take a closer look at the most common contingencies you’ll encounter when buying a home.
Financing contingency
If you’re planning to finance your home purchase with a mortgage, then your contract can contain a financing contingency. This allows you the time you need to apply and get approved for a home loan before you close on the house. When you include a financing contingency, you can get out of the contract if you are unable to secure financing for the home. Remember -- just because you are pre-approved for a mortgage doesn’t mean you will ultimately qualify. You will still need to go through the underwriting process to be approved.
Inspection contingency
Getting a home inspection can be a crucial part of the home buying process. After all, you want to have a clear picture of the condition of the home before you agree to buy it. A home inspection will reveal any issues there may be with the home, and you’ll receive a written report on the home’s condition and recommendations about repairs. The inspection contingency gives you the right to negotiate with the seller about these repairs. And if you can’t come to an agreement, you can walk away from the deal.
Appraisal contingency
When you apply for a mortgage, the lender will order an appraisal of the home. An appraisal determines the fair market value of the property. If your contract includes an appraisal contingency, then you are protected should the home appraise for less than the agreed-upon price. The mortgage company can only lend you the amount of the fair market price, so an appraisal contingency lets you negotiate with the seller, find additional financing, or back out of the deal if no compromise can be found.
Home sale contingency
Another common contingency with home buyers is the home sale contingency. This gives you a certain amount of time to sell your current home. If you are unable to find a buyer for your home in that time, then you can back out of the deal and get your earnest money deposit back. Be advised that sellers are less enthusiastic about home sale contingencies and including one can make your offer weaker than others.
Title contingency
Finally, you will also commonly encounter a title contingency in a sales contract for a home. The title refers to the record of ownership for a property. It also includes any existing liens or judgments against the home. The title is reviewed during the closing process and steps are taken to resolve any issues if they come up. However, a title contingency can give you the option to cancel the contract should a title issue remain unsolved before closing. This way, you don’t have to pay off someone else’s debts or have your ownership of the home contested down the line.
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