What's an Offer With Contingencies Mean?
If you are buying a home, you may have heard the term "contingent offer" mentioned. But what does it mean, and how will it affect your house purchase?
A contingent offer means that the seller has agreed to the buyer's offer, and the home in now under contract. However, the sale will only be closed when certain contingencies have been completed. These contingencies are added to the sales contract and allow the buyer to step away from the deal should something not work out as expected.
A contingent offer can be created to make sure any stage of the sale is fulfilled before the process can move on. It allows the buyer and seller to walk away from the deal if the contingency stage isn't met.
Contingent sale clauses allow the buyer to exit the contract previously agreed upon while getting their earnest money deposit back. The seller can't do a deal with another interested buyer until the contingent clause has been concluded, and the previous buyer has backed out.
This gives some security to the buyer and makes sure someone else isn't going to come along and offer more money for the property.
The most frequent types of contingent offers are to do with home inspections, appraisals, and the buyer's financing
Home Inspection Contingencies
Perhaps the most critical contingent offer situation is related to the home inspection. This allows for the home, you have set your heart on, to be thoroughly inspected without fully committing to the purchase. It is a safeguard against discovering something is very wrong with the property.
It allows the buyer to put down an earnest money deposit, while they keep some protection against closing on a property which will require expensive renovations post-sale. Should something be discovered during the inspection, the buyer can back out of the deal. They also have the option of renegotiating the offer price or asking the seller to fix the problem before proceeding.
Take a look at this excellent guide on everything to know about a home inspection when buying or selling a home.
Besides a general home inspection, a buyer may also want to have contingencies to check the following:
- Lead paint: If a home was built before 1978, and there is a child six years old or younger living in the house, lead paint is required to be removed.
- Asbestos: A known carcinogenic when breathed in can cause irreparable harm and even death.
- Radon: a gas that has been known to cause cancer with long-term exposure.
- Mold: A substance found in nearly every home. Mold becomes an issue when it grows beyond control. It can cause adverse effects to breathing, especially with those who already have a medical condition.
- Water Quality and Quantity: Checking to make sure you have ample potable water are prudent.
When you have contingencies in your offer for these potential issues, you're able to escape the contract with your earnest money deposit back in your hands. When purchasing a house, it is essential to have some understanding of what to expect from an inspection.
This contingency allows the buyer to back out should the property be appraised at a lower value than the offer. This appraisal is typically needed by the mortgage lender to discover what the fair market value of the house is. If the home is appraised as being worth less than the offer, the lender may only provide a mortgage to cover the agreed percentage of the fair market value.
Buyers can run into issues if they agree to forgo this contingency and then the appraisal finds that the property is worth less than the offer. This will mean the buyer won't have a loan large enough to cover the agreed offer, and they will need to come up with the difference by increasing their down payment.
In a market with a lot of eager buyers, sellers may want to have this clause removed, but buyers may want to resist. When you are in a market with there are numerous bidding wars; however, getting this clause accepted is far more challenging.
Waiving this contingency clause can be a big problem if the appraisal doesn't go your way.
Entering into a house purchase without the financing in place will create problems for the buyer and seller. A mortgage contingency is designed to make sure this situation doesn't happen.
The mortgage contingency gives the buyer a window of time to secure a loan, which will cover a percentage of the offer amount. If they then find that financing isn't available for that mortgage value, the buyer can leave the contract with their deposit.
As a buyer, it is better to go into a purchase when you know you are pre-approved for your loan amount. This could save months of your time in the purchase of the house and make sure you are making an offer that you can get a loan for.
Even if you are pre-approved for a mortgage, it isn't a good idea to waive this contingency. What happens if the lender decides to deny your loan at the last minute? It will leave you in danger of losing your deposit and the house you wanted to buy.
It is, in most cases, in the best interests of the buyer to keep these contingencies in the sales contract. It may lengthen the time it takes to close the sale, but the risks of giving up these contractual safeguards could be very significant if things go wrong in the process.
Before committing to any kind of mortgage, you should be asking the lender lots of questions. The answers you receive will determine several things, including whether you should use the lender you're considering.
Final Thoughts on Contingent Offers
Rarely in a real estate transaction, would you not have some kind of contingency. The home inspection, appraisal, and mortgage contingencies are the most common. That doesn't mean there couldn't be others. The seller may even have a contingency of their own such as finding a suitable property to purchase.
When buying a home, it is always advisable to do your due diligence. Your contingencies allow you to complete this process to your satisfaction.