How Do Home Buying Contingencies Work?

Buying a home usually involves a certain number of rules that buyers and sellers intend to follow, and contingencies are an important part. With a better understanding of the types of contingencies they might need, and how contingencies work for a home sale, buyers can be more prepared to make an offer.

What Are Home Buying Contingencies?

As a complicated and costly purchase, buying a home requires a great deal of careful consideration. Buyers may not always know if a home is going to be a good investment for them when they first see it. They may have other limitations that could slow down the buying process. Buyers often need some basic protections while they make sure that everything is in order with the home and the way they plan to pay for it. Contingencies in a purchase offer help to protect the buyer's interest and ensure that the seller knows precisely what the buyer needs to do before they can fully settle on buying the home.

What Are the Most Common Home Buying Contingencies?

Buyers have the ability to put a variety of conditions that have to be met in order for them to buy the home. There are a few common contingencies, including:

• Home Inspection/Due Diligence: to confirm that the buyer understands the home's condition before buying
• Financing: the buyer must be able to obtain a mortgage loan to buy the home
• Appraisal: the home must appraise for equal to or less than the purchase price, a condition typically set by mortgage lenders
• Home Sale: the buyer cannot buy the home unless and until they sell their current home

Although these contingencies may read similarly from one purchase contract to the next, buyers have some flexibility in determining the deadline and specific aspects of each individual contingency.

Do All Buyers Need Contingencies?

The goal of a home buying contingency is to provide some protection for the buyer, and particularly for their earnest money. When buyers make a formal offer on a home, they usually present some earnest money as a way to guarantee that they intend to act in good faith to buy the home. The earnest money ranges from hundreds of dollars to a certain percentage of the purchase price. If the buyer walks away from the sale, they may lose the earnest money. Buyers add the contingencies they need to protect that money, but most buyers do not need all contingencies available. For example, if they have no real estate they need to sell before buying, or if they can pay cash for a home, they may have no need of a home sale or financing contingency.

When Are Contingencies Used in a Home Purchase?

The initial purchase contract is a legal document that binds buyers and sellers to the agreement they reach. Buyers should put all contingencies in their initial offer, so that the seller understands exactly what the buyer intends to do before the sale is complete. Contingencies should be worded as specifically as possible, to avoid confusion and a possible legal battle over the earnest money deposit. Sometimes, the buyer and seller have to negotiate some of the terms of the contract before they both agree. The buyer should seriously consider any proposed changes to contingency language before accepting a counter-offer from the seller, to ensure that their interests are still preserved.

How Do Buying Contingencies Work?

Usually, the buyer is given a certain timeline in which to settle the terms of the contingency before proceeding to the next step of the purchase. For example, buyers may wish to complete their due diligence analysis of the property before requesting an appraisal or agreeing to a mortgage loan. When a contingency is met, the buyer's agent may notify the seller's agent that the step is completed. If any contingency fails, the buyer may be able to cancel the purchase contract on or before that contingency's deadline and retrieve the earnest money deposit.

Are There Any Limits to Home-Buying Contingencies?

Contingencies are meant to protect the parties in any transaction and while there are certainly many common contingencies, there are no rules against uncommon ones--provided you can get the other party to agree to it. There are, however, a couple of rules to look out for when buying a home on a contract with contingencies. For example, the sellers can include a "kick-out clause" that essentially gives them the right to continue accepting other offers on the home and give the original buyer a much shorter time frame to either remove the contingency and proceed with the sale or the seller can back out of the contract. Buyers should also be aware of the costs of buying a home as inspections and fees must still be paid, even if the deal ends up falling through. Because contingencies give sellers a slight layer of added risk, the agreed-upon price for the home may also be a bit higher for those with non-standard contingencies.

For many people, buying a home, whether it's in the Leduc real estate market or elsewhere, is the biggest purchase they will ever make. To protect their investment as they start the home buying process, buyers often place certain contingencies in a purchase offer. Each contingency must be agreed upon by both buyer and seller to form a contract, so the buyer can settle each contingency throughout the sale. When buyers know how to use contingencies for their own benefit, they can provide more information to a seller and avoid losing money unnecessarily.