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Understanding Contingency Clauses in Homebuying

June 24, 2021

Contingencies are specific conditions you can add to your home purchase agreement to protect yourself. They afford you the option to change or end your contract if the conditions specified within the contingencies are not met.

Contingencies are an expected, normal part of the homebuying process, providing both the buyer and the seller a legal way out of the contract if something goes awry. But too many contingencies can make your offer less attractive, so it's important to understand the market conditions in your area and discuss your options with your real estate agent when determining contingencies clauses.

Once your offer is accepted, you enter the closing period (typically, it takes 30-45 days to close a loan after your offer is accepted.) During this time, if your contingencies aren't met, you can still walk away from the sale without losing earnest money.

Here are some of the most common types of contingencies in a home purchase contract.

Home Inspection Contingency

Home inspections give you the opportunity to have the entire home you'd like to purchase examined by a professional before you close on your contract.

If the inspector finds issues, you can work with the seller to determine if they need to pay for repairs. Or, if you have a home inspection contingency, you have the option to back out of the sale.

Appraisal Contingency

Once your offer is accepted, your lender will order a home appraisal to get a professional opinion about the value of the home. Your lender will want to make sure the money they are loaning to you is equivalent to the true cost of the home.

If the appraisal comes in low, an appraisal contingency can allow you to walk away from the home purchase or renegotiate your offer price.

Mortgage Contingency

A mortgage contingency, also called a financing contingency, specifies the time limit for finding financing for your loan.

If you are not able to obtain a loan during the agreed upon timeframe, you can walk away from the home purchase without legal repercussions.

Home Sale Contingency

If you're already a homeowner and you need to sell your current home to finance your new one, you may want to add a home sale contingency to your offer. This contingency will outline a specific time frame during which you must sell your existing home to have the new home sale go through. If your existing home doesn't sell within the identified time period, your contract will be void and you will get your earnest money back.

From a seller's point of view, a home sale contingency is an added risk, because there's no guarantee that your home will sell. To mitigate that risk, the clause typically allows a seller to continue to market their home to other potential buyers while you try to sell yours.

Should I Drop Contingencies?

Contingencies protect you as a buyer, but they can also prolong the closing process and make your offer more complex when the seller compares all potential offers.

Before you consider dropping contingencies, be sure to speak with your real estate agent about the possible risks. They can guide you through your options and will help you make a strong offer that still protects your interests.

To learn more about the homebuying process, visit My Home by Freddie Mac®.

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