Once you find a home you want to purchase, you have to put in a purchase offer. This isn’t just the number you are willing to pay for the home. It also includes the contingencies you will require before signing the purchase contract.
The contingencies are often just as important to the seller as the price you’ll pay. The contingencies determine how many different ways you have to back out of the contract in a specific period. Of course, the offer consists of other details, such as the amount of earnest money, type of financing, and the date of closing.
In this guide, we will focus on the contingencies and which are the most important to include in your offer.
It is impossible for you to determine the condition of a home just by walking through it a few times when it is on the market. Even a trained eye cannot see the depth of any issues without careful inspection. That’s why a home inspection consistency is crucial.
This gives you a specific amount of time to have an inspector come out and look at the property. He will then write up a report, letting you know everything that he noticed about the property. The inspection may include some minor issues that you wouldn’t give a second thought. It may also include some major issues that could affect your desire to purchase the home.
If the inspection turns up something you are not comfortable with, you have the option to back out of the contract before the contingency expires. You don’t lose any money and you don’t have any further obligations to buy the home.
Home Mortgage Contingency
Even if you have a mortgage pre-approval, which we highly suggest, there is no ‘sure thing’ when it comes to a mortgage. Mortgages fall through every day. If your mortgage fell through and you did not have a financing contingency, you could lose your earnest money.
Including the financing contingency gives you a specific date that you must have a ‘clear to close,’ from your lender. If you did your preliminary work and provided the underwriter with your income and asset documents, there shouldn’t be a lot left for them to process. If your loan doesn’t go as planned, you have a little wiggle room in the contract. Once you near that final date, though, you’ll need to make sure your financing is in the clear or you do risk losing your earnest money.
The title contingency protects you against fraudulent activity from the seller. If a seller acts like the current owner, but doesn’t legally own the home, you could be in a bind. The title contingency gives you a window of opportunity to get out of the contract if the title does not come back with clear ownership of the property. Even if the ownership is okay, but there are liens on the property that the current owner is not willing to take care of, you can’t buy the home. If there are issues the seller cannot resolve, you can back out of the contract without losing any money.
Just like the home inspection, it’s impossible for you to know the true value of a home without a proper appraisal. The owner can tell you its worth as much as you bid. You may even find supporting evidence of the price on the internet based on recent sales in the area. However, until you have that appraisal report in your hand, there’s no guarantee of the home’s value. If the appraiser comes back and says the home is worth $10,000 less than you bid, your mortgage will fall through. If you have a financing contingency, you should be able to get out of the contract. However, a home appraisal contingency protects you even further. It gives you the opportunity to negotiate the sales price with the seller or walk away from the sale altogether.
Sale of a Current Home
The last contingency, which is sometimes controversial, is the sale of current home contingency. Sometimes buyers bid on a new home before they have a contract on their current home. If they don’t qualify for a mortgage while owning both properties, they’ll have to sell their current home. If it’s not under contract, the sale of a current home contingency can help protect you. If you don’t sell your home, you don’t lose any money by not following through on the purchase contract you signed.
Whether you include one or all of these contingencies in your home purchase offer is a personal decision. Each contingency is meant to help protect you in the event that you no longer can or want to purchase the home. Talk with your attorney before signing a purchase contract to determine which contingencies work best for your situation.