Home Buying Contingencies: What You Need to Know
The home buying contingencies are an important part of the buying process. Buyers need to be aware of the contingencies and how they can be used to their advantage when the time comes to buy a home. If you're a home buyer who is going to be entering the market soon, here's what you need to know before you make your first offer.
Once a home purchase offer is made by a buyer and accepted by a seller, the home buyer is obligated to purchase the home. However, many home buyers write contingencies into their purchase offer. The contingencies are clauses in the contract that enable the buyer to cancel the buying process, free of penalties, under certain conditions.
Most Common Contingencies
In general, there are three common contingencies that are included on the majority of home purchase offers.
The amount of money the bank is willing to lend the buyer depends on the value of the home. If the home appraises for an amount that is below the purchase offer, the lender will reduce the amount it is willing to loan the buyer to purchase the home. The buyer, depending on the state where they are located, may then have the option to make up for the difference out of pocket or renegotiate the price with the seller.
If the buyer is unwilling (or unable) to pay the difference and/or the seller is unwilling to renegotiate a lower price for the home, the appraisal contingency may allow the buyer to cancel the home purchase offer.
In cases where the home buyer is obtaining financing in the form of a mortgage, a finance contingency is usually included in a purchase and sale agreement. In most cases, the finance contingency allows a home buyer the opportunity to complete the mortgage process during the escrow period. If, however, the financing falls through for the buyer, most financing contingencies allow the buyer to cancel the contract.
Home Inspection Contingency
During the escrow period, buyers often opt to get a home inspection. If the home inspection reveals significant issues with the home, then the buyer may try to renegotiate the price or ask for repairs. If the seller will not renegotiate and/or will not make repairs, the buyer in most cases can cancel the home purchase.
How to Use Contingencies to Your Advantage
For a home seller, contingencies represent a risk. A buyer who wants to make a competitive offer can do so by waiving the contingencies up front - though this should only be done with caution and only with a real estate agents guidance. The contingencies are in place to protect the buyer. Waiving the contingencies should only be done if the buyer is confident they can afford to do so.
For example, a Lafayette home buyer who plans to pay in cash may choose to waive the appraisal and financing contingency, because they know they will not need financing from a bank. Buyers who plan to borrow money to pay for a home should think twice before waiving the financing and appraisal contingency, or they might lose their earnest or deposit money on the home purchase.
Work with Your Real Estate Professional
The home buying contingencies are an important part of the home buying process. Working with a real estate professional can help home buyers use the contingencies to their full advantage. If you're thinking about buying a home and need help throughout the purchasing process, contact a reputable real estate professional in your area. Your real estate professional can help you pick the right home and negotiate the best price for the property.