What is a Contingency in a Real Estate Purchase Contract?

What is a Contingency in a Real Estate Purchase Contract?

  • 05/7/18
When you’re buying a home for sale in Scottsdale, you’ll enter into a real estate purchase contract with the seller. Your real estate agent will structure your contract to protect you if something happens that might make you need to – or want to – back out of the deal.
That means building contingencies into your contract.

What is a Contingency in a Real Estate Purchase Contract?

A contingency is a condition your agent will build into your real estate purchase contract. If that condition isn’t met (by either party), you could be able to walk away from the deal without losing your earnest money deposit.
What is an Earnest Money Deposit?
An earnest money deposit is money you put down to show the seller you’re really willing to buy his or her home. Sometimes called a “good faith deposit,” earnest money lets the seller confidently remove his or her home from the market and stop showing it to other buyers.
It’s money that remains yours throughout the transaction, but you give it to your real estate agent to hold in escrow until the deal closes; then, it’s applied to your down payment or your closing costs, or it’s used for your mortgage payments.
If you back out of the transaction and there’s no contingency in your contract allowing you to do so, you could lose your deposit, which is typically between 2 and 5 percent of the home’s sales price.

Common Contingencies in Real Estate Purchase Contracts

The most common contingencies in real estate contracts have to do with:
  • Home appraisals
  • Home inspections
  • Financing

Home Appraisal Contingency

When you’re taking out a mortgage loan to buy a home, the bank will most likely order an appraisal. An appraiser will visit the home to determine its fair market value.
A home appraisal contingency lets you back out of the transaction if the appraisal comes in lower than the offered price. That’s because your lender is very unlikely to fund the full price of the home after an appraiser tells it that the home is not worth that much.

Home Inspection Contingency

You’ll hire a home inspector after you make an offer and the seller accepts it, but before you actually sign the dotted line that makes the home yours.
If your inspector uncovers issues in the home or on the property that you’re not willing to deal with, you may be able to walk away from the deal. However, you can also use things in the home inspection report as negotiating points with the seller, such as asking the seller to fix or replace something in exchange for your original offered price or asking the seller to lower the price so you can fix the issues yourself.

Financing Contingency

Nobody wants to be on the hook for buying a home out-of-pocket when they intended to borrow money from a lender, and that’s where a financing contingency comes in.
If you’re unable to secure financing to buy the home, a financing contingency lets you step back. This one protects you and the seller for a certain period of time; in that period, you’re expected to get the money for the house. If you can’t, you can cancel the deal.

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