A purchase contract is more than a monetary bid. You and the seller must agree on several other terms, including the purchase contract contingencies.
These ‘conditions’ are important and could make or break your deal. Without contingencies, you could be on the hook for a home you don’t want to buy anymore.
If you back out, you could lose your earnest money. With them, though, some sellers may not accept your offer.
Whether you should consider contingencies is a discussion between you and your attorney, but understanding what they are helps the conversation.
Financing Contingency
Most buyers get pre-approved before looking at homes, but it doesn’t guarantee final approval. Any loan can fall through if the conditions aren’t met. If you aren’t sure about your financing because you don’t know if you can satisfy the conditions on your pre-approval letter, consider a financing contingency. If you can’t clear your loan to close by the date on the contract, you can back out without losing your earnest money.
Inspection Contingency
This condition gives you time to order and receive an inspection report. The report details what’s wrong with the home and/or any pending issues (such as a faulty roof). The report gives you a chance to renegotiate with the seller. Usually, the seller has a few options:
- Fix the issues and provide proof of the work
- Provide a monetary credit for the cost at the closing
- Cancel the sale
Watch the date on the inspection contingency, as you may only get 7 – 10 days.
Appraisal Contingency
The appraisal contingency goes hand-in-hand with the financing contingency. If the house doesn’t appraise for at least as much as the purchase price, you won’t secure financing. But sometimes an appraisal contingency sounds better than a financing contingency as it puts the ‘pressure’ on the property and not you.
If the appraisal comes back low, you have a few options:
- Pay the difference between the purchase price and appraised value in cash
- Negotiate a lower sales price
- Back out of the contract
What Happens if you Use a Purchase Contract Contingency?
As long as you are within the dates and parameters of the purchase contract contingency, you should walk back out with your earnest money in hand. Your earnest money is funds you put down in ‘earnest’ of buying the home.
If you don’t buy it, the seller can keep the funds in exchange for taking the home off the market. The contingencies give you a chance to back out without risking your money. But like we said before, some sellers don’t like it.
If you want purchase contract contingencies, talk to the seller about them. A financing contingency may be unnecessary if you did your homework and got pre-approved for a loan. An inspection and appraisal contingency, however, is fully dependent on the property and protect you from buying a home that’s not worth and/or is in bad shape.
