Contingent: Everything It Means When Buying A House
Cathie Ericson9-minute read
September 17, 2020
Buying a home is still one of the top ways to build wealth, and real estate sales are up. However, even though 5.34 million existing homes traded hands in 2019, according to data from the National Association of REALTORS®, there are no certainties in any real estate transaction. Every single one has an element of surprise regarding how the process will play out because every seller, buyer, situation and house are different.
As a buyer, you want to protect yourself should something unexpected happen, given the fact that there is so much uncertainty; the purchase is so large; and it involves so many parties. That’s why every home sale is made “contingent” on what happens next, which allows buyers to back out if something goes wrong as the sale moves through the process on the way to completion.
“Contingent” definition in any sense means “depending on certain circumstances.” In real estate, it means that your offer depends on something else happening. Each time a person offers to do something if another person does something else, a contingent contract is created. So for example, if a seller offers a certain price and you as the buyer say the price is fine, provided the home inspection comes back clean, you have made a contingent contract. In this case, the sale of the house depends on the inspection being approved.
How Does A Contingency Work?
With a contingency, you have stated that there is a certain condition that must occur before the sale moves forward; if it doesn’t, the contract is void and the seller can move on to another offer received while the sale was contingent.
So returning to our example above, let’s say that we make the offer contingent on the home inspection showing a roof life of 15 remaining years. If the inspector deems the roof only has 7 years left and that’s unacceptable, that would trigger the contingent house status. The home seller might then decide to fix the roof or adjust the price, or the home buyers might decide to exit the contract, which they can without penalty since they had the contingency in place.
Contingent Offers: Contingencies At The Point Of Sale
The first part of home buying involves the honeymoon phase – you find a home and fall in love. After all, the home has the right square footage and number of bedrooms; it’s in the school district you want; and it’s even got a great yard for your pup. All those things are easy to ascertain just by looking at it. But what you can’t know at this point is what’s going on behind the walls, underneath the foundation, and other places where issues could be lurking. Could be a deal breaker, could not. But that’s not the only issue you might have with the house; for example, you may not have the money you need to purchase the house unless your own house sells.
Those qualifications then might become your contingencies. That’s why it’s important to have a REALTOR® who can help you manage these concerns. They might suggest, for example, that you as a home buyer offer the seller a purchase price, with a deposit, to show you have a serious intent to buy so you don’t miss out on the home of your dreams – especially in a hot market. But, since you don’t yet know if the house lives up to its appearance, or if your current home will sell quickly, you need to protect yourself by making the sales contract contingent on certain conditions.
The seller then has to agree, and you have entered a contract. If the contingencies are satisfied, then the home sale will move forward.
Sounds like it’s all working in your favor right about now, doesn’t it? But here’s the tricky part: The seller knows that a contingent offer can mean that their house sits in limbo, waiting for the home buyers’ house to sell, or they realize that they might be on the hook for expensive repairs if an appraisal contingency reveals something major wrong with the electric system, foundation, or another key area of the home that’s challenging to fix
That’s why any contingencies are a subject of negotiation between sellers and buyers. A seller might prefer that the offer comes with no contingencies. The buyer, of course, wants to make an offer that protects them by including contingencies. Because if you eventually back out of your offer without a contingency escape clause, you may lose the earnest money that you offered to seal the deal.
But back to the seller who doesn’t want a contingent house. That’s where adding contingencies can be risky, especially in a “hot” market where lots of home buying activity is taking place. Other buyers might make an offer without a contingency, which can make their offer look more appealing than yours and more likely to be chosen by the seller.
For example, if you have a contingency that your house has to sell, but another buyer’s offer doesn’t, the seller might decide that they don’t want to wait around for that eventuality. So you want to use the contingency clause judiciously in order to make sure your offer is as attractive as it can be.
Wondering what contingencies you might consider? Here are several common ones.
Home Inspection Contingency
The home inspection contingency allows a home inspector to make an assessment of the condition of the home, checking out all the aspects of it that might not be visible to the eye or that a home buyer might not think about, like grading or flashing. If the inspection reveals serious flaws in the condition of the home, the buyer may back out, or the buyer and seller may negotiate over who will pay for it to be fixed. In other words, even though you might have a home inspection contingency, you don’t have to walk away because there’s an issue with the house. You and the seller might come to an agreement on how to cover the repairs and resolve it.
A mortgage contingency gives the buyer a specific period of time to secure financing. The good news is that this is a contingency that can be mostly handled by doing some due diligence. First, you want to make sure that as a buyer you have been preapproved for a mortgage, not just prequalified.
The preapproval puts you far closer to actually getting the mortgage as it entails relatively lengthy paperwork up front to make sure your finances are in order. But remember that being “preapproved” still doesn’t mean you’ve been approved for a mortgage. Once you make an offer, you’ll need to do your final check with your lender.
Ideally all the paperwork will fall into place, because you’ve already gone through the majority of it in the preapproval phase. But there are still elements that can trip you up, such as if you’ve changed jobs, experienced a dip in your credit score, or had another financial issue that all of a sudden makes you a less-worthy candidate. It’s important to take excellent care of your finances during this phase to ensure there are no unpleasant surprises when you finalize your mortgage.
This contingency comes into play when you are taking out a mortgage. The seller might be asking for a wild sum and you might be all too happy to pay it, given the values in the neighborhood. But that asking price doesn’t necessarily reflect the value of the home. Lenders require an appraisal, which is a third-party look at what the home is actually worth.
In a very overheated or rapidly changing real estate market, it can often be an issue to meet that appraisal number. Even though both parties agree on a sale price, the lender can’t offer you a mortgage that’s larger than what the home is appraised for. But that doesn’t mean you’re out of luck. If you have the cash to pay more upfront to make up the difference between the amount of the mortgage loan and the agreed-upon purchase price, your lender may be willing to waive this contingency.
Many a buyer has been tripped up by this tricky piece of paper. The home’s title reveals who actually owns the house and who has owned it all along the way. However, sometimes homes don’t have “clean titles”; they might have encumbrances like easement issues or a mortgage lien from the past. Any claims against title can make a purchase risky for buyers. The good news is that title searches should reveal those problems prior to closing. And even if there’s an issue that you’re able to clean up, it’s wise to get title insurance, which provides protection against future claims.
Home Sale Contingency
This is the contingency related to the buyer’s financial situation, that the sale only goes through if your home sells first. While this can protect you, it’s common for sellers to reject this in a seller’s market, as the seller knows there may well be another buyer who doesn’t have this restriction.
Of course that doesn’t mean that you have to have the cash on hand to buy the new house before you sell yours. Your lender can help you with a “bridge loan,” or suggest other financial strategies, such as a cash-out refinance, that will allow you to sell one home while purchasing another.
Another way around this issue is to ask for a long closing date, which gives you more time to sell your house. Remember that some sellers might reject your offer because of this if they want to close the sale quickly, but it might be attractive to other seller, if they need to shop for a new home themselves or want to finish the school year in their home, for example.
Contingent House Status And Back-Up Offers
Now that you know all about contingencies, you might be wondering how they work. While all the particulars of the sale are being worked out, including the contingencies, the sale itself is called contingent. Even though you might have your heart set on this specific house, your real estate agent will probably recommend that you keep looking at houses and even make other offers, while it’s in a contingent status. That’s particularly important in real estate markets with low housing inventory and a surplus of buyers.
The last thing you want is to put all your eggs in one basket, and have it overturned due to a contingency not working out. You may also wish to negotiate terms that limit sellers’ rights to accept new offers. As always, rely on your real estate agent to help you negotiate the best terms for your situation.
Contingent With A Kick-Out
Note that sellers might request a kick-out provision while they wait. In a contingency with a kick-out, sellers can continue to consider offers, and they will generally be looking at ones with fewer contingencies than the first offer.
While contingencies can be important to protect you, this is another reason to make your first offer with as few contingencies as possible. But the good news is that the sellers can’t kick you out just because they find a better offer; they must notify you and give you a certain period of time to remove the contingencies.
Contingent With No-Kick-Out
On the other hand, in a buyer’s market, sellers may accept a contingency with a no-kick-out provision, which would prevent them from accepting new offers while the contingencies are worked through.
Contingent Vs. Pending
These are two terms that are often confused, but indicate different parts of the sales cycle. In the contingent sale, an offer has been accepted by the seller, but everyone is still working through the issues. Eventually the sale moves to “pending,” which means the issues have been resolved, and the deal is almost done. At this stage, the parties are simply waiting for documentation to be completed so the sale can move to “closing.” Once you’re in the pending stage, you’re almost there; most sellers will not continue to show the home while it’s pending, as they are contractually precluded from accepting offers. The house is almost yours!
Why Contingencies Matter
Buying a home comes with a lot of stress – after all, it’s likely the biggest purchase you’ll ever make, and it can be nerve-wracking to take the step. Fortunately, there are safeguards in place when you make an offer in the form of contingencies that can protect you as you move through the home-buying process. However, as you can see, they also can come with pitfalls if the seller chooses not to accept an offer with them.
What contingent means in real estate is that you are making the best decision you can at the moment with the information you have.
Want to learn more about home buying process? Check out our library of articles that cover a wide range of issues – and don’t forget to lean on your real estate agent, someone who can help ensure you have all the information you need for this life-changing purchase.
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