How Often Do Contingent Offers Fall Through? What You Should Know
Dan Rafter5-minute read
July 21, 2023
Ready to buy a home but worried that you might pay more than what a property is worth? Or maybe you need to sell your current home before you can afford to begin making mortgage payments on a new one. This is where contingent offers come in: A contingent offer states that you won’t close on the purchase of a home until something else happens.
Contingent offers provide protection to buyers. But there are risks involved, especially for sellers. Because contingent offers require some other event to take place – such as an appraisal of a home for a certain amount or a home inspector giving a residence a passing grade – they can fall through.
Fortunately, most contingent offers do reach the closing table. That doesn’t mean, though, that buyers and sellers shouldn’t be aware of any warning signs that a contingent offer won’t result in a completed sale.
Contingent Offers: An Overview
A contingent offer is not unusual in real estate. Most offers have at least one contingency: The home sale won’t go through until after the buyer orders a home inspection. If the inspector finds serious problems, the buyer might be able to walk away from the deal.
The inspection continency might be the most common, but it is not the only type of contingent offer.
Buyers who are also trying to sell a home might state in their offer that they won’t close on their new home until they first sell their current. This is known as a home-sale contingency. In this type of contingency, buyers usually have a certain number of days to sell their home before closing on a new mortgage for the property they’re buying. If that period passes and the buyers haven’t sold their home, sellers can entertain other offers for their home or the buyers can move ahead with the purchase, taking on two monthly mortgage payments until they sell their current home.
There’s also the appraisal contingency. After buyers and sellers agree on an offer, the lender representing the buyers will order an appraisal of the home. Lenders want to make sure that the home’s market value is equal to or higher than the final sales price. If the appraisal comes in too low, the lender won’t provide a mortgage for the full sales price. It will only lend as much money as the home is worth. An appraisal contingency states that if the home doesn’t appraise for at least its sales price, the buyers can walk away from the deal and have their earnest money deposit refunded.
There is a difference between contingent and pending. When a home is listed as pending, it means that the buyer and seller have agreed on an offer and are waiting for the home sale to close.
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How Often Do Contingent Offers Fall Through?
As a seller, you might worry that accepting a contingent offer might delay or scuttle your home sale completely. Here’s some good news: Most home sales reach closing, even with contingencies attached.
A survey from the National Association of REALTORS® found that only 5% of home sale contracts in the months of June, July and August of 2022 were terminated. Only 15% of sales contracts were delayed during those 3 months.
Buyers and sellers, then, shouldn’t worry that a contingency automatically dooms a home sale.
Why Might Contingent Offers Fall Through? 4 Common Reasons
Some contingent offers won’t reach closing, though. Here are the most common reasons why.
1. The Buyer’s Finances Aren’t As Stable Anymore
After the buyers and sellers agree on a sales price, the buyers’ mortgage lender will start the underwriting process. Lenders will look at buyers’ credit score and credit report. They’ll also ask for copies of documents that they can use to verify the monthly income of buyers. Lenders will also consider the buyer’s debt-to-income ratio, a measure of how much of their gross monthly income buyers’ total monthly debts consume.
If buyers’ credit scores are low, their credit reports are dotted with missed or late payments and their debt-to-income ratio is too high, a lender might reject their request for a mortgage, something that could scuttle a home sale.
This could happen even if buyers had received pre-approval from a mortgage lender before they started looking at homes. Maybe a borrower lost a job after the preapproval was approved or buyers missed several credit card payments after earning preapproval, something that caused their credit scores to plummet.
2. Issues Arise During The Home Inspection
Most home sales contain a home inspection contingency stating that the sale won’t close until after the buyers order an inspection of the property. If an inspector finds serious problems during the home inspection, such as a sinking foundation, evidence of mold or a roof that needs to be replaced, the buyers might be able to walk away from the sale and still recover their earnest money deposit.
Sellers might be able to prevent this by fixing the problems themselves, providing the buyers with cash so that they can hire a contractor to repair the issues or lowering the home’s sale price.
3. The Appraisal Is Lower Than The Sales Price
After the buyers and sellers agree on a contract, the lender working with the buyers will order a home appraisal of the property. During the appraisal, an appraiser will determine the fair market value of the home. If this value comes in under the sales price, the home sale could be scuttled. If the buyers and sellers agreed on a sales price of $370,000 and the appraiser says the home is worth $360,000, the buyers’ lender cannot provide a loan based on the sale price. The buyers could make up the difference by bringing $10,000 of cash to the closing table (in addition to their down payment) or the sellers could lower the asking price.
If either of these doesn’t happen? The sale might fall through.
4. Issues Arise During The Title Search
Maybe the home’s sellers didn’t make all their property tax payments. If so, the county government might have an ownership claim on the home. Maybe the sellers failed to pay a contractor who then filed a lien against the property.
If buyers uncover liens on a property, they might walk away from the sale if the sellers don’t resolve them before the sale closes.
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What Happens If A Contingent Offer Falls Through?
If you make an offer and the sellers don’t satisfy its contingencies, the sale will not close. Depending on the contingency, you can walk away from the sale and still receive a refund of your earnest money deposit.
Say your offer has a home inspection contingency. If the inspection finds serious problems and the sellers won’t resolve them, you can typically withdraw your offer and still receive a refund of your earnest money.
The Bottom Line
Though it doesn’t happen often, there is a risk that contingent offers will fall through. This doesn’t mean, though, that you shouldn’t include contingencies when making an offer. An example? You should always include a home inspection contingency. If you’re ready to start your own search for a home, apply for prequalification from us. Doing so will let you make the strongest possible offer.
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How Does A Mortgage Contingency Work?
Home Buying - 4-minute read
Victoria Araj - July 11, 2023
A mortgage contingency is a clause that sets up certain conditions for a real estate transaction. Learn how this can protect both home buyers and home.
What Home Buyers Need To Know About Appraisal Gaps
Home Buying - 6-minute read
Victoria Araj - June 07, 2023
An appraisal gap occurs when a home appraisal comes in lower than an accepted offer. Learn more about what an appraisal gap is and how a home buyer can react.