What are Home Buying Contingencies?
Purchasing a home is a unique consumer experience. It's not the same as purchasing just about any other product since you're not able to "return it" like you would with, say, a smartphone. Because of the legal and financial process involved with transferring property, contingencies are imperative for both buyers and sellers alike.
Contingencies are contractual obligations the seller and buyer must fulfil prior to the close of escrow. Essentially, contingencies are a way "out" should one or more of them not be met by either party. They also serve as a form of consumer protection in the event the home inspection produces a report of any major issues.
So, what are the Different Types of Contingencies?
While not an exhaustive list, there are several common contingencies that are often included in the buyer-seller contract:
Home Inspection Contingency
A frequent contingency, the home inspection requirement generally provides the buyer with at least one home inspection prior to and as a parameter for closing escrow. Based on negotiations with the seller, the buyer may request to have their own experts conduct the inspection.
This may be included as a part of the lenders requirement for loan approval. However, even if the purchase is a cash transaction, many buyers – particularly investors – seek to understand the differential between the appraisal and sales price.
Loan Approval Contingency
Lenders will almost always research the property, including performing their own appraisal, prior to approving a buyer's loan. Also, if for some other reason the loan does not go through, then the language of the financing contingency usually allows for the buyer to cancel the contract.
Home Selling Contingency
For buyers who are selling their current home, a home sale contingency offers an agreement between parties as to whether or not the purchase contract proceeds in the event the buyer's home does not sell.
Home Insurance Contingency
If the buyer is attempting to secure a mortgage, home owners insurance is often a contingency between the buyer and their lender. It may be challenging for homes located in higher risk areas (for example, assessing insurance options when buying a home in Lakeway that's near the water may take more time than it would when purchasing property in Pflugerville) so the details of the home insurance contingency within the contract rely upon state, lending, and any additional requirements agreed upon between the home buyer and seller.
Financing contingencies protect buyers by stating that if the buyer's loan isn't approved, they can cancel the home buying contract without penalties. Financing contingencies are included in nearly all home buying contracts when the buyer is planning to take out a loan to buy the home. Buyers who plan to pay for a home in cash can waive this contingency to make the offer more attractive to sellers.
Buyers who plan to get a mortgage and who also choose to waive this contingency are taking a risk. They may lose their earnest money if something goes wrong with their loan. Home buyers should work with their real estate professional before making the decision to waive this contingency.
It's a two-way street
State and local regulations aside, the addition or exclusion of certain contingencies largely depends on the agreement between the buyer and seller. Also, the length of contingencies varies in the same way.
After one side, or the other, meets the contingencies listed in the contract, there is a time limit for releasing contingencies. Each state dictates how long a buyer and seller have in terms of releasing said contingencies, and this is further modified by the contingency type.
For example, in California, there is a default 17-day period for the buyer to release a loan contingency. While this can be lengthened or shortened, if the buyer does not release the contingency, and time has run out, the seller can send a Request for Buyer to Perform. This may extend the release of contingency window for an additional 24 to 72 hours. If the buyer does not act on the request, the seller can cancel the contract.
Though, at first glance, contractual contingencies appear to be one sided in favor of the buyer, these agreements also protect the seller. If a buyer contingency is not met, the seller has the ability to cancel the contract as stipulated within the written agreement between buyer and seller. As such, it's wise to pay close attention to the number and type of contingencies within a purchase contract. The selling and purchasing of real property is a huge responsibility. Contingencies are another layer of negotiations and legal obligations within the process.