7 common contingencies to include in a real estate offer

Making an offer on a house is an exhilarating feeling, as it brings you one step closer to moving into your dream home. That excitement can also come with an equal amount of anxiety. What if something goes wrong? This is why contingency clauses exist, to protect you during the home-buying process. As you read, you’ll discover different kinds of home purchase offer contingencies, from inspection contingencies to HOA, and how they’re applied.

What is a contingency in real estate?

In real estate, a contingency is a clause that’s written into a purchase agreement that allows a party to back out of the deal if certain conditions are (or aren’t) met. If the condition mentioned in the contract isn’t met or waived, the sale can’t be finalized.

Buyers who cancel for a reason allowed by the contract, such as under an active inspection, appraisal, or financing contingency, can often recover their earnest money. If they cancel outside those terms, they may forfeit it. Contingencies can allow you to keep that money under specific conditions.

Most important contingencies to put in a home offer

Adding contingencies to your offer is a great way to be protected from unforeseen issues. Below are some of the most common types of contingencies that home buyers include.

1. Home inspection contingency

Home inspection contingencies allow buyers to back out of or revise their offer if significant problems are found during a home inspection. Structural issues, like a cracked foundation, water damage, or faulty appliances, can be easily missed at first glance, but an inspection can bring them to light. Any problem that threatens the structural integrity of the house should give buyers pause before going forward with a home purchase.

Buyers with home inspection contingencies must get the inspection done within a set time period. There can also be stipulations that the seller fix any issues that the inspection uncovers up to a certain dollar amount.

2. Appraisal contingency

Home appraisals are an evaluation of a home’s value given its age, condition, location, and other factors. Appraisal contingencies come into play when there’s a discrepancy between a home’s listed value and appraised value, allowing buyers to back out if the appraised value is lower than the sale price. If an appraisal comes in lower than expected, both parties can renegotiate, or the buyer can make up the difference. Otherwise, the buyer is free to cancel the contract.

3. Financing (mortgage) contingency

Also known as mortgage contingencies, financing contingencies allow the buyer to back out of a deal without penalty if they’re unable to secure a mortgage within a specified period of time.

Buyers usually have between 30 and 60 days to secure a loan. If they fail to qualify for the loan, whether it’s because your credit score is too low or your loan-to-value ratio (LTV) is too high, or they don’t meet the loan program requirements, the financing contingency comes into play.

4. Title contingency

Title contingencies allow the buyer to back out of a sale if issues are discovered during the title search. Title searches, which are used to establish the rightful legal owner of a property, are carried out by a title company and can take around two weeks. Possible issues include an unpaid lien, which is a legal claim against property that is used as collateral, or an ownership dispute.

5. Home sale contingency

If a buyer is unable to sell their current home before the deadline established in the contract, a home sale contingency allows them to cancel the sale. Those looking to buy and sell a house at the same time would be wise to include this contingency. Time pressure and the risk of having to pay two mortgages until your old home sells can make it difficult to sell and buy simultaneously.

6. Insurance contingency

Insurance contingencies allow buyers to back out of a purchase agreement if they’re unable to get homeowners insurance on their new home. Most lenders require homeowners insurance so that they’ll be financially protected if your home experiences a covered loss. If the home you wish to buy has potential hazards, is on the older side, or has an extensive claim history, insurers might turn you down.

7. Homeowners association (HOA) contingency

Homeowners associations, or HOAs, are organizations that manage certain residential communities. To fund essential services in the community, homeowners pay monthly, quarterly, or annual HOA fees. They can also impose fines and penalties if residents violate HOA rules. HOA contingencies allow the buyer to back out if they disagree with the HOA’s rules or documents.

When should you waive contingencies?

While contingencies can offer a safety net for buyers, there are situations where waiving them is the best course of action. In a seller’s market, waiving contingencies can give you an edge over other strong offers. If you have the financial flexibility or risk tolerance to make an offer without contingencies, you’ll likely have an advantage over those who choose to proceed with them.

Keep in mind that waiving contingencies leaves you open to potential risks, whether that means having to pay to address home inspection concerns yourself or paying two mortgages at once if your old home doesn’t sell. Take this into consideration and evaluate the housing market before making that decision.

How to make a strong offer with contingencies

While waiving contingencies is a great way to strengthen your offer, it isn’t the only one. Here are some ways to make a competitive offer on your dream home without sacrificing the security that contingencies provide:

• Work with an experienced real estate agent: A real estate agent can advise you on how to navigate the home buying process.
• Get preapproved for a mortgage: A mortgage loan preapproval shows that you’re serious about buying and able to secure financing.
• Offer a large earnest money deposit: Offering a larger earnest money deposit can also signal a high level of interest in buying the house.
• Include appraisal and inspection gap clauses in your offer: Appraisal and inspection gap clauses can prevent deals from falling through, making the offer more enticing to the seller.
• Limit seller concessions: Asking for fewer seller concessions takes some of the financial burden off their shoulders.

The bottom line: Contingencies protect buyers and reduce their risk

Contingencies in real estate exist to protect home buyers from unforeseen issues. Including them in your purchase agreement can provide peace of mind while preserving your earnest money. While proceeding with contingencies in your contract is recommended for most, those with higher risk tolerance may choose to waive them.

Are you ready to take the first step toward buying a home? Start your mortgage application today with Rocket Mortgage.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

Refinancing may increase finance charges over the life of the loan.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.

Contingencies and cancellation rights vary by state, local contract form, and the specific purchase agreement.