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You found a house that fits your budget and wish list, and now it's time to make an offer.
But questions remain. Is the property really worth the asking price? Are there hidden structural problems? Will your home loan application win final approval? Steps during the mortgage process — including an appraisal, a home inspection and underwriting — will provide answers, but in the meantime, you can include contingencies in your offer.
Making a contingent offer on a home
A purchase contract is legally binding, and breaking one can be costly. Making a contingent offer protects your interests in case unexpected issues mean you no longer can or want to buy the home. A contingent offer includes "walk-away" clauses, or "contingencies," that let you get out of the deal and retrieve your earnest money deposit if certain conditions aren't met.
Think of a contingency as an “if-then” proposition. For example: If the appraised value of the property is lower than the purchase price, then I can ask for a lower price or get out of the contract.
» MORE: Tips for first-time home buyers
When working with your agent to write the offer, you'll have to decide which contingencies to include. Your real estate agent can explain your options and make recommendations.
Although real estate contingencies protect your interests, be aware that too many stipulations in the contract can reduce the likelihood of the seller accepting your offer, especially in a tight market.
Types of real estate contingencies
Here are some examples of contingencies that can be included in home purchase agreements.
A home inspection contingency lets you negotiate the sales price, ask for repairs or walk away from the sale based on the inspection results.
Your contract may stipulate that repairs must be made if problems are uncovered, but that can lead to closing delays while the fixes are scheduled and approved. You may prefer to renegotiate the sale price if significant improvements are needed.
Sales contracts may also be written with “a right to void.” This means the buyer won’t require repairs suggested by the home inspection report but can cancel the sale without penalty.
In hot markets, buyers may feel pressure to forgo home inspections to win bidding wars. But this is risky, and there are other ways to strengthen an offer, such as being flexible on the closing date. A seller, for instance, may want additional time to move out.
Unless you're buying a home with cash, this contingency is necessary even if you’re preapproved for a mortgage. Preapproval is important, but it's not an absolute guarantee. After a home is under contract, your loan still must go through a final stage of underwriting. If your financing falls through, a mortgage contingency gives you a legal out from the purchase contract.
When a home appraises for less than the offer amount, your financing may fall through, or you may have to put more money down to buy the property. A property appraisal contingency lets you back out if the appraisal comes in lower than a certain amount.
Home sale contingency
Under a home sale contingency, your offer is subject to the successful sale of your current house. The contingency is most often based on a specific time period — such as 30 or 60 days — after which the contract is forfeited. You're off the hook for buying the home, and the seller can entertain other offers.
Including a home sale contingency in a seller's market puts your offer at a serious disadvantage. With lots of buyers competing for a limited number of homes, sellers are likely to get and choose offers without this condition.
Other standard contingencies can include such things as a termite certification, a report showing clear title to the home and the definition of a reasonable time period to close the sale. But there may be additional conditions you want to include in an agreement.
Real estate contingency deadlines
Each contingency has an associated deadline. For example, a home inspection contingency would state a time frame for the inspection to take place and give the buyer a certain number of days to ask the seller to make repairs or lower the sales price.
Keep track of contingency deadlines so nothing sneaks up on you — and so you won’t miss an important date to enforce a condition the seller must meet. Having a calendar with all deadlines listed, perhaps even with pre-deadline notices a few days ahead, will help you stay on top of critical contingencies.
Throughout this process, you’ll want your agent to guide you; in more complicated cases, you may even want the advice of a real estate attorney. It’s easy to get tripped up by legal jargon, and sometimes what’s not in writing does the most damage.