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Buying a home is exciting, but the transaction can come with some risk. For instance, the home you’re considering may have problems you didn’t notice when touring the property, or you might not qualify for the home loan. Contingencies can protect you from some of these risks.
Here’s an overview of what contingencies are and which ones you might include in your offer:
- What is a contingent offer?
- How often do contingent offers fall through?
- Types of contingencies
- Should you make a contingent offer?
What is a contingent offer?
A contingent offer is an offer to purchase a home that includes clauses allowing you to walk away from the deal if certain conditions aren’t met. You’ll typically get your earnest money back, too, as long as it’s written in the contract.
Buyers often include loan contingencies to protect themselves in the homebuying process. You have several contingencies to choose from, but the most common contingency clauses are:
- Appraisal contingency
- Home inspection contingency
- Financing contingency
How often do contingent offers fall through?
Contingencies rarely cause an offer to fall through, but it does happen. In May 2020, 76% of recently closed home sales included purchase contingencies, and 9% of all contracts were ultimately terminated, according to the National Association of Realtors.
Types of contingencies
Once you choose a home you’d like to buy, you or the real estate agent will send a purchase offer to the seller. You can decide whether to include contingencies, and the seller can decide whether to accept the offer and may negotiate the details.
If you’re not sure which contingencies to include, your real estate agent can provide guidance.
Here are some of the more common contingencies:
Home inspection contingency
In the NAR report, 59% of homebuyers included a home inspection contingency in their offer — by far the most common type. The home inspection clause gives you the right to have the home professionally inspected, which protects you against purchasing a home with significant and expensive issues.
Sellers typically want the inspection to take place within days of accepting the offer, so you (the buyer) can decide quickly whether you’ll go through with the home purchase.
If the home inspector finds issues, you can negotiate the sales price, ask for repairs, or cancel the offer and potentially get your earnest money back.
During the underwriting process, the lender will order an appraisal to figure out how much the home is worth. If the home appraises for less than the purchase price, you’ll need to cover the difference or negotiate with the seller to lower the price.
But if you can’t reach an agreement, the appraisal contingency allows you to cancel the deal and avoid overpaying for the home.
Although homebuyers typically get pre-approved for a mortgage before starting the homebuying process, it’s not a guarantee they’ll pass the underwriting review. A financing contingency allows you to terminate the home purchase agreement if you don’t qualify for a home loan, which protects you against buying a home you can’t afford.
Credible can be a big help when trying to find a home loan. You can easily compare our partner lenders in minutes — all without leaving our platform.
Home sale contingency
With a home sale contingency, your offer is contingent on the sale of your current home. You’ll usually need to include a timeline, such as 30 to 60 days, in the contingency. If you don’t sell the home within that time frame, you either cancel the contract or move forward.
There are two types of home sale contingencies:
- Sale and settlement contingency: Under this contingency, you’re trying to sell your home but haven’t received an offer yet.
- Settlement contingency: This contingency is when you have an offer or a signed purchase and sales agreement, and you’re waiting for the closing to take place.
Sellers are more likely to accept a settlement contingency since you’re farther along in the selling process.
A coronavirus contingency allows a homebuyer to back out of the transaction or make slight changes to the contract if the pandemic interferes with their home purchase.
For example, the contingency might allow you to cancel the contract if you lose your job because of the pandemic. Or you might be able to move the closing date if you become ill with COVID-19 or a government mandate makes it impossible to meet key contract deadlines.
Learn More: How to Get a Mortgage
Should you make a contingent offer?
Contingencies are designed to protect your interests as a borrower — to make sure the property is safe, you have the money to pay for it, and you’re not stuck paying a mortgage on two homes at once.
But contingencies are also a hassle for sellers because they may lead to extra costs or slow down the closing timeline. They may even hurt your chances of getting the home of your dreams in a seller’s market.
In May 2021, 28% of homebuyers waived the appraisal contingency and 25% waived the inspection contingency, according to another NAR report.
Only you know what you’re comfortable waiving, though. When creating your offer, think about the protections you want in place. If you decide to include a few, there are other ways to strengthen your offer, such as making a larger down payment or offering more escrow money.