A contingent offer means that an offer on a new home has been made and the seller has accepted it, but that the final sale is contingent upon certain criteria that have to be met. These criteria, or types of contingencies, are clauses in a sales contract that typically fall under three major categories: appraisal, home inspection, and mortgage approval.
Such contingencies are mainly put in place so that buyers can back out of a real estate sale if something goes wrong, usually without losing their earnest money deposit. A seller might entertain other offers after a refusal, but won’t deal with another buyer until the contingent offer is settled in one way or another.
Home inspection contingent offer
One of the most common contingencies for home buyers is the home inspection contingency. In this time frame, this contingency gives buyers the right to hire a home inspector and have their new home professionally inspected after putting down earnest money. And finalizing the real estate transaction usually hinges on this contingency. If something is wrong, a contingent offer allows the buyer to request that it be fixed and to renegotiate the price—or back out of the sale. It’s rarely advisable to waive an inspection contingency, and home buyers should generally consider this a must-have clause in a sales contract.
“Never in my life have I seen a home inspection contingency waived,” said Bishoi Nageh, vice president of branch operations for the Petra Cephas Team at Mortgage Network Solutions.
If something is wrong with the current home on the real estate market, a good inspection will find it.
Nageh recalled an instance of a first-time buyer who asked the seller to fix up some windows, then found that mold had been growing under the framework. This is how a contingency works during a home sale. Once you know the problems, you can talk with the sellers about what they need to fix before you buy the home.
Appraisal contingency
With this real estate contingency, a third party hired by the mortgage lender evaluates the fair-market value of the current home for sale. In the event that the appraised value proves to be less than the sale price, the home appraisal contingency lets you back out of the deal.
“It’s in no one’s best interest to overpay,” Nageh said. “If the home comes in under the [asking] amount, you have the right to back out.”
In hot markets, potential buyers might feel pressured to waive a contingency, but they could end up paying more in the long run. The lender will only put up a certain amount of money for the appraised cost—which may not be the asking price—and the buyer will have to cover the rest to reach the purchase price.
For example, let’s say you qualify for a fixed-rate loan that covers 90% and you need to put 10% down for a new house selling for $500,000. If the property is appraised at $475,000, the lender is only going to cover 90 percent of that appraised value, or $427,500. In this case, instead of a $50,000 down payment, you would be expected to put down $72,500 to cover the difference. Waiving this contingency in the purchase contract can be a gamble.
Mortgage contingency
You don’t want to sign a contract for a home purchase without having the money to back it up, or at the very least, a preapproval. A mortgage contingency is a contingency that protects the buyer and seller from getting into a real estate sale without a proper loan. Under this contingency, the buyer has a specified period of time to obtain a loan that will cover the mortgage after the offer is accepted. If the buyer can’t get a lender to commit to a loan, the buyer has the right to walk away from the sale with the down payment.
To expedite the home buying process, “Know if you qualify sooner than later,” Nageh said. If you’re pre-approved, you won’t be wasting the seller’s time or yours during the loan-hunting period, which could take a couple of months.
Like an appraisal contingency, eager buyers and sellers in hot real estate markets might want to waive the financing contingency for the current home for sale, especially if cash is on the table. But waiving this contingency means that if your mortgage lender delays or denies your loan after a seller accepts your offer, you can lose the deposit during escrow, so it’s a risky venture.
