What Is A Contingent Offer?

Hanna KielarDecember 07, 2019

A contingent offer is one that has been accepted on a new home, but the final sale is dependent on specific criteria that are usually set by the buyer.

These contingencies usually fall under three main categories in a sales contract:  appraisals, home inspection, and mortgage approval.

Contingencies like these are put in place so a buyer can back out of a real estate sale if something goes wrong at a specific point in their home closing process.

The best thing about a home sale contingency is that it can usually be enforced without the buyer losing their earnest money or deposit.

You shouldn’t feel any negative way about requiring a contingent sale because, just like homeowners insurance, it’s a normal part of the home buying process.

Let’s look at the different types of contingencies and how they usually work.

Home Inspection Contingency

A home inspection contingency is essential when you are looking to close on your home, and you should never waive them under any circumstances.

These inspections are also known as due diligence contingencies, and they give the buyer the right to have the home inspected by a professional home inspector. Usually, the inspection must be done within a specific period, like 5 – 10 days.

This inspection protects the buyer from purchasing a home that has issues and allows them to cancel the contract or negotiate repairs based on the findings of the home inspector.

What Does A Home Inspector Do?

A house inspector is going to examine the interior and exterior of the property. They will be looking for things like the condition of the plumbing, structural issues, electrical, finishings, and ventilation elements.

Once they are done with the inspection, they will give a report to the buyer that shows if they discovered any issues during the investigation.

Now, here’s the thing:

Based on the specific terms of the home inspection contingency, the buyer could take any of the following actions:

●     Request time for additional inspections if they think something needs another look

●     Approve the inspection and continue with closing on their home

●     Not approve the inspection, back out of the deal, and get their earnest money refunded

●     Ask for repairs to be completed or for a concession

What’s A Cost-Of-Repair Contingency?

A buyer might also already have a cost-of-repair contingency as part of the contract. This specifies the maximum dollar amount that would be given for repairs that are considered necessary.

Ordinarily, they are included in addition to the inspection contingency and are based on a specific sales price percentage, like 1%.

If the inspection report shows that repairs are going to cost more than the maximum dollar amount allowed, then the buyer can back out of the contract.

Appraisal Contingency

The appraisal contingency is used to make sure the property is valued at a minimum amount.

Mostly, the buyer or mortgage lender gets to have a third party come in to determine the fair market value of the home.

If the property doesn’t appraise for at least the specified amount, the contract can be terminated.

This contingency protects the buyer, and in most cases, the earnest money will be refunded if the contract is terminated due to a low appraisal.

Home appraisal contingencies can include terms that allow the buyer to purchase the home even if the appraisal is below the specified minimum amount.

The buyer could also request that the seller lower the price of the home to match the appraisal amount.

However, if you are getting a mortgage on your home, the lender might only cover the estimated cost if your home appraises for lower than what it’s worth.

For example:

Let’s say you have a loan that will cover 90% of the cost of the home, and you have to put down 10%. If the house costs $250,000, before the appraisal, you would need to pay a $25,000 down payment.

If the house appraised for $225,000, the lender would still only cover 20% of what the house actually appraised for, which means you would now have to come with a down payment of $47,500 to purchase the home.

Low property appraisals are a common reason that mortgages don’t get approved, so the appraisal contingency is a critical part of your contract and shouldn’t be waived.

Mortgage Contingency

A mortgage contingency is a clause in the purchase agreement that states the offer is contingent on the buyer being able to secure financing to purchase the home.

This contingency is also known as a financing contingency, and its primary purpose is to protect the seller and the buyer by giving the buyer the time to obtain their financing.

In the event the buyer is unable to secure financing from a bank or mortgage broker, they can back out of the contract and get their earnest money back.

The seller is protected because it makes sure they don’t end up with a buyer who can’t actually purchase the home.

This contingency will also state a specific number of days the buyer is given to obtain financing.

The buyer must pay attention to this period because if they don’t terminate the contract before that time, the contingency can be waived.

If this happens, even if you can’t obtain the funding, you would still be financially obligated to purchase the property.

Prepare Yourself For The Mortgage

You must have a good credit score so that you can get a loan preapproval before you start looking for a new home.

The worst thing you can do is find a home that you can’t get approved for. To prepare your credit for buying a home, you should:

Know your current FICO® Score: There are several places online that will give you a free credit score. However, you want to focus on your FICO® Score when it comes to getting a mortgage.

Lower your credit utilization: Credit utilization is a huge factor when it comes to your credit score. You should be paying down as many credit cards as possible so that this factor can help increase your score. The lower your utilization, the better your score.

Get a copy of your credit report: Along with knowing what your credit score is, you should be 100% aware of what’s going on with all three of your credit reports. You need to make sure you don’t have any collections on your report and that there isn’t anything you need to dispute.

Have at least three accounts older than 6 months: Customarily, a lender will want you to have a few tradelines on your account, and they want to see a history of at least 6 months. This helps with your average age of accounts and also your credit mix.

After your preapproval, freeze your credit: You won’t believe how many people get denied for their loan right before they are about to close on their home. You want to be sure that nothing new hits your credit, so doing a credit freeze until you close is a great idea.

No large purchases: Remember, your goal is to lower your credit utilization, not increase it, if you make a large purchase and it hits your credit, your score will probably drop because of the increase in your usage. You’ll also see an increase in your debt-to-income ratio.

Home Sale Contingency

A home sale contingency is put in a sales contract when a buyer must sell or settle their current home to finance the new home.

The contingency will state terms in regard to the specific time the buyer has to sell their home, and if the buyer sells their home by that date, the contract moves forward.

However, if the home doesn’t sell, the contract is terminated and the buyer can get their earnest money back.

A home sale contingency is going to be the most difficult on the seller because they might have to pass up any offers while they are waiting for the buyer’s home to sell.

There are two different types of home sale contingencies and we discuss them below:

Sale And Settlement Contingency

A sale and settlement contingency is used when the buyer has not received or accepted an offer on the home they are currently selling.

Usually this type of contingency allows the seller to keep marketing their home to other buyers.

However, it does come with the stipulation that the buyer is given the opportunity to remove the contingency within 24 – 48 hours of the seller receiving another offer.

If the buyer is still unable to remove the contingency at that time, the contract is terminated and the seller can accept an offer from other home buyers.

The buyer will also receive their earnest money back.

Settlement Contingency

A settlement contingency is used when a buyer has received or accepted an offer on the home they are currently selling and has a closing date on the calendar.

This contingency will protect the seller in-case the sale of their current home doesn’t finalize.

Usually this type of contingency does not allow the seller to keep marketing their home to other buyers.

As long as the buyer’s home closes on the date listed in the offer, the contract will remain valid, but if the home doesn’t close, the contract can be terminated.

Time To Finish Closing

There is a ton of work that goes into closing on your home, and each small step clears the way for your most important purchase.

These contingencies are set in place to protect the buyer so that they don’t end up purchasing a home that has unknown damage to it or one that won’t appraise for the correct value.

Whatever you do, don’t waive these contingencies for any reason; you’re better off losing the home of your dreams than buying a money pit.

Once all of these contingencies have been met, it’s time to finish your closing process and get ready to move into your new home.

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    Hanna Kielar

    Hanna Kielar is an Associate Section Editor for Quicken Loans focused on personal finance, recruiting and personal loans. She has a B.A. in Professional Writing from Michigan State University.