What Does Contingent Mean In Real Estate?

Have you made an offer on a house that the seller has accepted, but it has yet to be finalized?

This means that you have reached a contingent offer, and the seller has yet to finalize the sale, and it is contingent (waiting for certain criteria to be met).

Generally, the criteria or contingencies will fall under the following categories: mortgage approval, appraisal, and home inspection.

A contingency is put into place as a means to help the buyer back out of a sale if something goes awry. Most of the time this will also happen without the buyer losing their deposit as well. The seller may choose to entertain other offers but won’t show interest to another buyer until the contingent offer is finalized in some manner.

Further detail about each major contingency category:

Mortgage Contingency

If you don’t currently have the money to back up a sale, then you will not want to sign a property sale. Due to this, a mortgage contingency will protect the buyer from getting locked into a sale without having acquired a proper loan.

This will give the buyer a certain amount of time to obtain a loan that will cover the mortgage. During this time period, if the buyer can’t get a lender to commit to a loan, then they will have the ability to walk away from the sale, with their down payment intact.

In order to not waste your time (or the seller’s for that matter), make sure that you qualify for the loan sooner than later. Getting approved for a loan can take a couple of months, and you will want to expedite this process as much as possible.

If you’re in a hot market, and cash is on the table, then eager buyers and sellers may want to waive this contingency. If you are to do so, and your loan gets denied, then you might lose the deposit you put down. This could be a very risky venture.

Home Inspection Contingency

This type of contingency might be the absolute most important one. This allows a buyer to have the right to make sure that the home is inspected professionally.

If something were to be wrong with the home, then the buyer has the right to request that it be fixed, or they can back out of the sale. It is ill-advised to waive an inspection contingency.

You can rely on a good inspection to find, and pinpoint any problems with a home. Once a problem is found, you can then converse with the seller about what needs to be fixed before your make your final purchase.

Appraisal Contingency

In this scenario, a third party is hired by the lender, who then evaluates the fair-market value of the home.

If the appraised value is less than the sale price, the appraisal contingency will allow you to back out of the deal.

Eager buyers may feel as if they want to waive it if the market is hot. This is almost never a great idea, as it could cost you more money. The lender will only ever put up a certain amount of money for the appraised cost (not the asking price), and then the buyer will end up covering the rest.

Ex. – Let’s say that you have a loan that covers ninety percent, but you need to put down ten percent, on a home that is selling for five hundred thousand. If the house was appraised at four hundred and seventy-five thousand, then your loan will only cover ninety percent of this, which would be four hundred and twenty-seven thousand.

What this ends up meaning, is that instead of having a down payment of fifty thousand, you now owe seventy-two thousand, and five hundred dollars in order to cover the difference. Can you see why waiving this contingency might be a bad idea?

This covers our brief on the 3 major contingencies.

Questions? Ask here.

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