Buying a home is a major financial commitment, and contingencies act as essential safeguards to ensure you're making a secure and well-informed investment. These conditions help protect you from unexpected surprises and give you the flexibility to address any potential roadblocks before finalizing the deal. This article goes over some of the most common ones, though Homa can help you write additional contingencies if needed.
What Are Contingencies?
Contingencies act as safeguards, allowing you to back out of the contract if certain requirements are not met. Contingencies help mitigate risks and provide assurance that you are making a sound decision before finalizing the purchase. Common contingencies include:
Financing Contingency
Home Inspection Contingency
Appraisal Contingency
Home to Sell Contingency
Title Contingency
Homeowners Association (HOA) Contingency
Financing Contingency
A financing contingency ensures that you can secure a mortgage for the property. If you’re unable to get financing, this contingency allows you to back out of the deal and get your earnest money deposit refunded.
Mortgage Approval: Specify that the offer is contingent on obtaining a mortgage with a specified interest rate and terms.
Loan Timeline: Include a timeline for obtaining financing to keep the process on track. Homa’s resources can help you understand the mortgage approval process and manage timelines effectively.
Speak with Your Lender: Make sure the terms you are submitting as part of your financing contingency are achievable, and keep in mind that, in most cases, you cannot change your loan type or terms without voiding this contingency.
Home Inspection Contingency
A home inspection contingency allows you to have the property professionally inspected to identify any potential issues. If significant problems are found, you can negotiate repairs, ask for a price reduction, or cancel the contract.
Inspection Period: Specify a time frame (usually 7-10 days) to complete the inspection.
Negotiation Terms: Outline how you will handle any discovered issues, such as requesting repairs or credits. Use Homa’s home inspection checklist to ensure a thorough evaluation of the property.
Specify Different Types: Some state contracts require you to be specific about what kinds of inspections you want to have done. For example, in Florida you can do your full set of inspections under one home inspection contingency, but in Virginia you have to separately specify if you want to be able to do a Wood Destroying Organisms (WDO) inspection.
Appraisal Contingency
An appraisal contingency protects you if the property’s appraised value is lower than the offer price. If the appraisal comes in low, you can renegotiate the price, bring more cash to the table, or walk away from the deal.
Appraisal Value: State that the offer is contingent on the property appraising at or above the offer price.
Renegotiation Options: Include options for renegotiation if the appraisal is low, including how long you will have to carry out those negotiations.
When to Include: While some people believe their financing contingency protects them if the appraisal comes in low, best practice is to include an additional appraisal contingency if you are concerned about whether the home will appraise.
Home to Sell Contingency
If you need to sell your current home to finance the new one, a home to sell contingency ensures that you’re not committed to the new purchase until your existing home is sold.
Time Frame: Specify a time frame within which your current home must sell.
Backup Plans: Outline what happens if your home doesn’t sell in time, such as extending the contingency period or canceling the contract.
Understand Terms: Some state contracts have specific addendums that require additional terms be agreed upon in order for you to add this contingency.
Title Contingency
A title contingency ensures that the property has a clear title without any legal claims or liens. If issues are found during the title search, you can address them before proceeding with the purchase.
Title Search: State that the offer is contingent on a satisfactory title search.
Title Insurance: Consider requiring the seller to provide title insurance to protect against future claims.
Understand Nuances: Different states and contracts have varying definitions of what does and does not count as a title issue. If you have specific concerns you want addressed and researched, speak with the title company prior to submitting your offer to confirm they will cover them and that your contingency includes them.
Homeowners Association (HOA) Contingency
If the property is part of an HOA, this contingency allows you to review the HOA’s rules, fees, and financial health before committing to the purchase. Condo communities have similar contingencies.
HOA Documents: Request a copy of the HOA’s rules, financial statements, and meeting minutes.
Review Period: Specify a period to review these documents and decide if you’re comfortable with the HOA’s terms.
Things to Review: Make sure you review the rules, regulations, and most recent budget to confirm the HOA is in good financial health and you will be able to live happily within the community.
How Homa Can Help
Setting the right contingencies in your offer is essential to protect your interests and ensure a smooth home buying process. By including contingencies, you can safeguard yourself against potential issues and make a confident, informed offer. However, keep in mind the more contingencies you request, the less likely the seller may be to accept your offer. Balance protecting yourself with getting your offer accepted, based on what you're comfortable with. Use Homa’s AI tools and resources to understand each contingency and how to effectively include them in your offer. With careful planning and the right contingencies, you can navigate the home buying process with peace of mind and achieve your goal of homeownership.