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If you’re thinking about buying a house and are currently browsing active listings, we’re sure you have come across some listings listed as “contingent.” If you’re unsure of what contingent means on a home sale, this article is just what you need.
What contingent means in home sales
Let’s begin by stating a couple of obvious facts. One, every home is unique, because every buyer and seller is unique as well. This means there is no definite way to predict how the home sale process will unfold.
Second, a home sale is a lot more complex than potential home buyers simply liking a home and making an offer on it. And that is where contingencies come into play.
The word contingent in itself means depending on certain circumstances. In a home sale situation, a contingent sale is when a prospective buyer has made an offer that the seller has accepted, but in order for the deal to go through, the seller has to ensure certain criteria are met. The time period a listing can stay contingent is between 30 days to 90 days.
If those criteria aren’t met, it is likely that the deal falls through. For example, if the buyer makes a contingent offer that he/she will buy the house as long the home inspection is flawless, it implies that while the buyer likes the house, if the home inspection throws up major red flags, then the buyer may withdraw from the sale.
On average, only 5% of all contingent offers fall through.
How contingent offers work
In most cases, contingencies are used to protect the buyer from unforeseen problems with the property and from problematic real estate listings.
If a seller has accepted an offer from you with a contingency, it means that unless a certain condition is met, the sale is void. Only after that happens can the seller move on to other backup offers that may have been received while the sale was contingent.
To elaborate on our previous example, let us suppose that your offer on a house has a home inspection contingency stating that the physical structure of the home should remain damage-free for at least 10 years after you purchase the home. However, the inspection shows that the roof will last only a maximum of five years.
In that case, you are no longer required to follow through with the deal, and the seller is also free to consider other offers that may be on the table.
Home buyers and sellers both have different approaches to contingencies. While contingent offers protect buyers from unfavorable real estate deals and give them the freedom to walk away from those deals without having to lose out on earnest money, sellers usually prefer offers without contingencies.
Also, a contingent offer is not always going to be in the buyer’s best interest. For example, in a hot market, where there are more buyers than homes available, a contingent offer is likely to be disregarded in favor of offers without contingencies.
What are the different types of contingencies?
Here are some common contingencies for home buyers to consider while making an offer on a home.
Home inspection contingency
A home inspection is when a certified inspector inspects a home to see if there are any issues with it that the seller may not have mentioned on the contract or that may be invisible to the untrained eye.
A home inspection contingency allows for the home buyer to walk away from a contract after an offer has been made and accepted if there are any findings from the inspection that are unfavorable. It also gives the buyer the option of renegotiating the terms of the sale with the seller.
A mortgage contingency offers the buyer the option of walking away from a sale if they aren’t able to secure a new mortgage on the property within a stipulated time period.
Fortunately, this is hardly ever the case. Most buyers get pre-approved for mortgages before making an offer on a home. The pre-approval process finishes a lot of the lengthy paperwork upfront, which means it is that much easier for the buyer to get the mortgage once they decide on a property.
However, keep in mind that things like a sudden job change or a dip in credit score can mean that even the pre-approved mortgage can fall through. This means you, as the buyer, need to be very careful during this period of time to make sure there are no sudden changes that can affect the chances of your mortgage being approved.
An appraisal contingency comes into play when you are getting your new mortgage loan approved. The seller may want a certain sum of money for his home, and while you may be willing to pay it, the mortgage lender will only lend you what the appraised value of the home is.
This often creates issues in hot markets, where the appraised value can be lower than what the seller wants. However, this does not mean you need to walk away from the home of your dreams because there is a difference between the amount the seller expects and what your lender approves.
You could either try and renegotiate the terms of the sale with the seller, or if you can, pay the difference in cost out of pocket.
This is one of the most protective contingencies for a home buyer. A home’s title is proof of who the current owner of the property is, and who has owned it in the past. A title search, which is a part of the closing process, confirms this.
However, not all homes have clear titles. This means that after you have bought the home, the legal owner of the house could come back and contest your occupation of the property if the title is not clear.
A title contingency ensures you can walk away from the deal without having to pay anything if the title is not in the seller’s name.
Home sale contingency
A home sale contingency is where the sale is only confirmed if the buyer’s current home is sold first. This contingency is most often rejected by sellers, especially if it is a seller’s market.
There are, however, options that you could explore to tide you over until your current home sells. For example, mortgage lenders offer bridge loans, or you could apply for a personal loan as a makeshift arrangement.
What are the types of contingent offers?
Now that you know of the common types of contingencies that you could use while shopping for your new home, let’s take a look at the two types of contingent offers that matter the most to real estate transactions.
Contingent with a kick-out clause
This is why it is prudent for you to make an offer with as few contingencies as possible.
Contingent without a kick-out clause
This happens in buyer’s markets, where the seller cannot accept other offers after accepting a contingent offer until the resolution of the contingencies.
Is contingent the same as pending?
A lot of people confuse the two terms, but pending statuses are very different from contingent, even though they’re part of the same process.
When a transaction is a contingent, it means that there are issues that need to be resolved before it can proceed. Once these issues have been dealt with, the sale moves to the pending status, during which all the parties involved wait for the paperwork to be completed before moving to close.
Why are contingencies important?
Buying a home is often the single biggest investment for a lot of people. There are the large sums of money, the excitement of moving into a new home as well as the hopes and dreams that come with building a family in a new home.
Contingencies, if used correctly, can help you protect yourself from deals that seem too good to be true and make sure that the money you’re investing into your new home is worth your while. So always depend on the services of a good real estate agent to help you negotiate the home buying process.