Buying your first home is exciting, but it’s also one of the biggest financial commitments you will ever make. It also comes with risks, such as unexpected inspection issues or your financing falling through.
However, contingency clauses can act as a safety net. They protect the buyer and their investment.
Common types of contingency clauses
Interested homebuyers often make an earnest money deposit when making an offer on a house. It shows the seller you are serious about purchasing the property. If the buyer backs out of the deal without a valid reason, the seller typically retains the deposit to compensate for lost time and opportunities.
A contingency clause is a condition that must be met before a real estate contract can be finalized. If the condition isn’t met, the buyer can back out of the transaction without losing their earnest money deposit.
Common contingency clauses include:
- Inspection contingency: Allows the buyer to have a professional inspector evaluate the home. If serious defects are found, such as structural damage, a leaky roof or outdated electrical wiring, you can request repairs, renegotiate the price or exit the contract.
- Financing contingency: Even if you were pre-approved for a loan, issues can still come up. This clause ensures that you aren’t stuck with a home you can’t afford.
- Appraisal contingency: Mortgage lenders often require this type of contingency. It ensures that the home appraises at or above the asking price. If it doesn’t, you can renegotiate the price or walk away from the deal.
- Sale of current home contingency: Gives the buyers time to sell their existing home before closing on a new one. Without it, you could be stuck carrying two mortgages.
- Title contingency: Ensures the seller has clear ownership of the property. If there are liens or ownership issues, you can back out of the sale until those issues are resolved.
In a seller’s market, some home buyers may feel pressured to waive contingencies to make their offer more appealing. While this may strengthen your bid, it leaves you vulnerable. Working with a legal professional can help ensure your investment is protected and your dream home doesn’t turn into a money pit.