While a contract to purchase a home is a pretty iron-clad agreement, it is subject to a number of escape clauses called contingencies, which allow both buyers and sellers to break the contract if certain specifications outlined in the contract are not met. Home contract contingencies also allow the parties to end the contract without any financial liability; this is important for buyers, who are liable to forfeit any submitted earnest money if they pull out of a purchase contract without justified cause.
There are a number of different types of contingencies, and available contingencies vary from state to state. Not all contracts include all available contingencies, and some buyers choose to waive their right to certain contingencies in order to make their offers more attractive. Following are some of the most common and useful types of contingencies, but this is by no means a complete list. Buyers and sellers should work with their agents to determine the contingencies that are most important to them, as well as those which make the most sense for the property going under contract.
- Inspection. The inspection contingency allows the buyer to cancel the contract if the inspection uncovers any defects or issues which the buyer finds unacceptable. The inspection contingency is meant to provide escape for buyers unable to shoulder the burden of substantial home repairs that aren’t readily apparent, such as mold, structural issues, etc. In some states a buyer can invoke the inspection contingency without citing specific issues; in such cases the buyer simply “disapproves” the inspection report, and the contract is void.
- Appraisal. This contingency concerns the appraised value of the home for sale. Buyers financing their purchase with a new home loan are usually required by their lender to pay for a home appraisal, which ensures that the worth of the home balances the value of the issued mortgage credit. The appraisal contingency allows buyers to cancel a contract if they find that they offered more money for a home than the home was appraised to be worth.
- Loan. Unless a buyer is paying cash, a loan contingency is a likely clause in a contract, meant to protect buyers from financing difficulties. Loan contingencies dictate that the buyer has a certain amount of time to obtain a loan commitment letter from a lender, proving they can obtain the financing necessary for the home sale to proceed. If buyers make a “good faith” effort to secure financing and cannot, they can revoke the contract without losing their earnest money. Without this financing contingency, a buyer could be on the hook to purchase a home despite their inability to secure a loan, which can mean lawsuits and big financial
trouble. - Title. Before purchase, buyers will need to make sure that there are no outstanding claims of ownership on the property, including liens (debts for which the property is collateral), or easements (non-ownership rights). Buyers procure the services of a title research company to discern if the current seller has “clean title” to the property, and has the right to sell it. If the title search finds any issues with the title that the buyer finds unacceptable (such as easements that restrict certain changes to or construction on the property), the buyer can invoke the title contingency to cancel the sale.
- Defects and hazards. In California, which leads the legislative way for a number of other states, there are a slew of disclosures and inspections that are part of outlining potential hazards in the home, such as lead, radon, or mold. Also, sellers are obligated to disclose information on any natural hazards that may affect the home or the property. In the case of inspection findings, or information included in the disclosures, buyers may choose to cancel the contract if they don’t like what they see. Some buyers may also opt to perform separate roof, structural, plumbing or water supply inspections, upon which contingencies can be placed in the contract.
- Existing home sale. Another typical contractual contingency is making the sale of a home dependent upon the successful sale of another piece of real estate—usually the buyer’s current home—the proceeds from which the buyer intends to use in the contracted sale. In this case, the buyer has a stipulated amount of time in which to sell their property. If they fail to sell the home in time, sellers can take advantage of this contingency to cancel the contract and look for another buyer.
See Also:
Pre-Approval and Tips for Choosing a Mortgage
About.com – Contract Contingencies
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