Definition and Examples of a Homebuying Contingency
A homebuying contingency is a clause added to a real estate sales contract that allows the buyer (or, less often, the seller) to walk away from the sale if certain conditions are not met.
While many home sales have some contingencies, it’s important to find the right balance of protecting yourself without asking for too much and putting the sale on jeopardy. There are several common ones, but it’s not always a good idea to add them to your home contract.
A home sale may be contingent on any number of factors; Common ones include the timing of the sale, the condition of the home, the buyer’s ability to finance the purchase, or the home’s appraisal value.
- Alternate names: Contingent offer, contingency clause
Note
A January 2020 survey by the National Association of Realtors (NAR) found that 76% of home purchase contracts had contingencies. The most common contingency allows the buyer to walk away if the home inspection turns up anything troubling.
How Does a Homebuying Contingency Work?
Homebuying contingencies are important tools to protect buyers, and in some cases, sellers. When the home contract is drawn up, buyers and sellers (usually through their real estate brokers or attorneys) can negotiate which contingencies should be included.
Once a contingency is added to the contract, that stipulation must be met in order for the sale to go through. So, for instance, if the parties agree that the home sale is contingent on the buyer’s ability to secure a home loan and then the buyer loses their job, affecting their mortgage eligibility, the parties can break the contract and the buyer gets back their earnest money or “good faith” deposit.
Types of Homebuying Contingencies
There are a number of common homebuying contingencies, most of which protect the buyer. These include:
Home Inspection Contingency
Making the home sale contingent on a property inspection means that if the report reveals major issues with the home, the buyer can back out of the agreement. This could be anything from signs of termite damage to issues with the foundation or the plumbing or electrical systems. This is a very common contingency for a reason: It’s an important tool to protect buyers from purchasing a “money pit,” and it can provide negotiation power for the buyer to get a better deal.
Appraisal Contingency
After you make an offer on a home and go into contract, at some point, the home will be appraised by a third party. You can add a contingency that says that if the property appraises for a much lower value than the agreed upon sales price, you can break the contract and get back your earnest money.
Financing Contingency
Just because you were preapproved for a mortgage doesn’t mean it’s a sure thing. Adding a financial or mortgage contingency lets the buyer walk away from the transaction if they can’t secure a home loan within a specific time frame.
Home Sale Contingency
For buyers who have to sell their current home in order to buy their next one, this can be an important contingency to add. It allows the buyer to exit the contract if they can’t sell their home by a certain date. This protects them from ending up with two mortgage payments at once. Plus, many people will need the proceeds from one home sale to put down a large deposit on their next home.
Note
Although a less common practice, sellers also may add contingencies to a homebuying contract. The most common one for them to add is called a “kick-out” or “release” clause.
Because it’s not in the seller’s best interest to have a home-sale contingency, they sometimes compromise by adding a stipulation, known as a release clause, that allows them to continue marketing the house after receiving an offer. This allows the seller to potentially get other offers, in case it ends up that the original buyer can’t sell their home. If another offer is made, the seller must give the original buyer 72 hours to either remove their contingency or cancel the contract.
Do I Need Homebuying Contingencies?
Homebuying contingencies offer the buyer extra protection, so it’s usually a good idea to ask for ones that are important to you. However, in a seller’s market, be aware that asking for certain contingencies (or too many) might make you a less-attractive buyer.
Put yourself in the seller’s shoes. If they get two similar offers that both are above listing price and Buyer One asks for an appraisal contingency while Buyer Two doesn’t, it’s likely the seller would go with the second buyer.
Note
According to NAR’s Realtors Confidence Index Survey, more than a quarter of buyers waived an inspection-contract contingency and an appraisal contingency in the summer of 2021, which was an especially competitive market period.
It’s important to discuss your contingency strategy with a real estate professional or attorney whom you trust so you can make the best decision for your own situation.
If you are buying a home with a Federal Housing Administration (FHA) loan, there are built-in contingencies because appraisals are required, and the home must meet minimum property standards.
Key Takeaways
- A contingency in homebuying is a clause added to a sales contract that gives the buyer or the seller an out, should a particular requirement not be met.
- If a contingency is not satisfied, the contract is canceled and the buyer gets back their earnest money deposit.
- Most contingencies protect the buyer. Common examples involve the sale being contingent on a satisfactory inspection, an appraisal close to the sales price, obtaining mortgage/financing, and the ability of the buyer to sell their current home.
- In a seller’s market, asking for certain contingencies could make you a less-attractive buyer, so get advice from a professional as you proceed.
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