Purchase Contract Contingencies: What You Need to Know
What is a Purchase Contract Contingency?
A contingency in the purchase contract is essentially the answer to “what if” questions. They can be written to benefit the buyer and seller of the property, providing a way out of the deal if certain conditions aren’t met. They are a safety feature, and many different contingencies could be added to the purchase contract. A contingency is something that must happen for a sale to proceed, such as “The sale is contingent upon appraising at not less than $100,000”. If one party wants out of an agreement, it has a way to escape. Likewise, if a party can’t deliver on its promise — for example, if it can’t get financing or passes away — it can cancel and get out with a minimal loss.
Most Commonly Used Purchase Contract Contingencies
What are common contingencies included in the purchase agreement? Here are five types of purchase contract contingencies you should know about.
Financing Contingencies
Most people take out a mortgage loan to finance their property. However, sometimes a mortgage won’t go through for some reason or another.
Issues will arise even when things seem to be moving forward smoothly. After preapproval and submitting an offer, there may be an issue with the loan application. This might lead to a denial of the loan.
If this happens, it’s natural that the buyer will want to withdraw from the contract, as they no longer have the money to buy the property. Adding a financing contingency means they will have the opportunity to do so.
Home Inspection Contingencies
This contingency covers the buyer if they aren’t happy with the home inspection. While it is rare, some minor issues could be addressed before the sale closes with seller assistance written into the agreement. Unfortunately, there may be other problems that the home inspection finds that aren’t minor at all, such as a bad roof or a cracked foundation. Having the home inspection contingency allows buyers to back out of the purchase. This contingency should be included in every contract and typically requires that the inspection be completed within ten days of signing the contract.
Home Appraisal Contingencies
Mortgage lenders use appraisals to ensure the property you want to buy is worth the amount the seller is selling it for and that you agreed to pay. Sometimes, the appraisal of a property might show that it is worth less than the sale price. Having this contingency in place will make it easier for you to renegotiate the home’s purchase price or get out of the deal.
Sale of the Current Home
This contingency will make the sale dependent on the buyer’s current home sale. If you, as the buyer, cannot sell your current property, this contingency will give you a way out of your obligation to buy the new home. While this will protect the buyer, many sellers are wary of this contingency, as the sale of their home rides on the sale of your current home.
Title Contingencies
A title is a legal document that shows who has owned the property and who currently owns it. When buying a home, a title company will check the title to ensure that there aren’t any issues with it, such as liens or even disputes about who the house’s true owner is.
If there are issues with the title, they could be taken care of before closing if they are simple problems. However, if the issues are larger and more complicated, it could become a major problem. Sometimes, they can’t be resolved. If that’s the case, you will be happy that you have a title contingency in place, as it can let you out of the contract, so you don’t have to deal with continued title headaches.
Final Thoughts
If you are in the market to purchase a home, it is important that you understand what a Purchase Contract Contingency is and how it can protect you. The most common contingencies are for financing, home inspection, and appraisal. It is also important to be familiar with the sale of the current home, title, and escrow contingencies. Flynn Law has represented buyers in real estate transactions for over 15 years, and we would be happy to review your Purchase and Sales Agreement free of charge. Contact us today if you have any questions about purchase contract contingencies or any other aspect of purchasing a home.