If you're a home buyer making an offer on the waterfront home of your dreams, you might spend a lot of time thinking about home buying contingencies. Understanding what contingencies are and how they can benefit you is important. Once you know how contingencies work, you'll be able to make choices that can make your home purchase successful.
What Are Home Buying Contingencies?
Home buying contingencies are clauses in a home purchase contract that enable the home buyer to drop out of the purchase if certain conditions are not met. There are three major home buying contingencies that are used in home purchase contracts.
What Are the Different Kinds of Contingencies?
Perhaps the most commonly utilized contingencies are the home appraisal contingency, loan contingency, and the home inspection contingency.
Home Appraisal Contingency
The home appraisal contingency allows the buyer renegotiate the contract if the home does not appraise at a value higher than or equal to the purchase price of the home. This contingency exists because a low appraisal price can affect the amount the mortgage lender will loan the buyer. Under these circumstances, if the home appraisal contingency was not in place the buyer would be forced to put down more money for the down payment on the property. As long as the appraisal contingency is on the contract, the Navesink buyer is protected. He or she may be able to negotiate a lower purchase price or back out of the contract entirely.
Home Inspection Contingency
Typically, a home buyer makes an offer on a property without knowing what problems lie inside. Once the home inspector goes through the property and identifies these problems, some buyers find themselves rethinking their purchase. The home inspection contingency allows a buyer to negotiate a lower price if problems are discovered with the property. The home buyer may also ask the seller to make repairs. If the seller and buyer cannot reach an agreement, then the contingency enables the buyer to cancel the contract.
The loan contingency states that a home buyer can back out of the contract if the lender does not fund the mortgage. The loan contingency is important because problems with a loan can happen at all stages of the home purchasing process, even at the very last minute. The loan contingency protects the buyer from making a purchase he or she cannot afford in the event that they are unable to obtain new home financing. The loan contingency is the final contingency that is lifted before the purchase is finalized.
When Should You Think About Waiving Contingencies?
Sometimes home buyers make the decision to waive the contingencies in their initial offer. Waiving contingencies can make an offer more attractive to a seller by taking the ambiguity out of the home selling process. With the contingencies dropped, the seller can rest assured that, generally speaking, this may improve the chances of the purchase will going through to closing. This peace of mind may even push homeowners to accept an offer.
A buyer who wishes to waive the appraisal contingency should only do so if he or she has the money to pay whatever amount may be required to pay if the home does not appraise at the proper value. Finally, a home buyer can waive the loan contingency if he or she has money to pay for the property in cash. If the buyer does not have funds like this, waiving the loan contingency could lead to a very difficult situation if the loan does not fund.
What Happens If the Buyer Backs Out of the Contract After the Contingencies are Lifted?
If the buyer backs out of the contract after the contingencies are lifted, the buyer will forfeit the earnest money deposit. The seller may choose to keep only a portion of the earnest money, or may keep the entire deposit.
Where Can You Find Out More About Home Buying Contingencies?
If you're a home buyer who would like to know more about contingencies, talk to your real estate professional. He or she can answer your questions and help you decide whether or not you should waive your home buying contingencies.