What Are Contingencies When Buying a House?

Learn About Common Contingencies for Home Purchase Offers

Homebuyers can often include contingencies when they make an offer on a home. Contingencies are requirements that must be met before your offer can be considered final. When contingencies aren’t met, you can usually back out of a purchase agreement without a penalty (such as forfeiting your earnest money).

Contingencies can help reduce your risk when you are purchasing a home. However, they might also make your offer to buy a home less attractive to the seller. That’s because offers with contingencies can make it less likely that you will buy the home. As a result, sellers may prefer a similar offer with fewer contingencies from another buyer.

Here are some common homebuying contingencies you may want to consider:

What Is a Home Sale Contingency?

This contingency makes your offer to buy a house dependent on selling the house you currently own. This contingency often defines a period of time during which the home must sell. If the home does not sell during that period, the purchase offer will be canceled. The home sale contingency is included in many offers. It is also a contingency many sellers may be reluctant to accept.

What Is a Financing Contingency?

This contingency makes your offer to buy a house dependent on getting approved for a mortgage. It usually defines the period of time you have to secure financing from a lender. If you are not approved for a mortgage before this time period ends, you can back out of the contract.

Getting prequalified for a mortgage might help make sellers more willing to accept this contingency because it may give them more confidence that a lender will offer you a loan.

What Is an Appraisal Contingency?

This contingency makes your offer to buy a house dependent on the appraised fair market value of the house that matches the purchase price of your offer. An appraisal contingency often gives you some room to negotiate. For example, if you offer to buy a home for $350,000, and the appraised value is $340,000, you might ask the seller to reduce their price by $10,000.

If you offer to buy a home for $350,000, and the appraised value is $200,000, this contingency could let you withdraw the offer and get your earnest money back. An appraisal contingency can also help protect you when you apply for a mortgage. Lenders usually will not give you a mortgage when the sale price of a home is significantly higher than its appraised value.

What Is a Home Inspection Contingency?

This contingency makes the purchase of the house dependent on the result of a home inspection. Home inspections look for problems with the structure of a house, heating and cooling systems, electrical systems, plumbing, and more.

When an inspection finds a problem, this contingency can allow you to negotiate with the seller to fix the problem or reduce the sale price of the house. It can also allow you to withdraw your offer if major issues are found. For example, if the inspection finds that the water heater is more than 20 years old and likely to leak soon, you can ask the seller to replace it before the sale closes. If the inspection finds the house has extensive termite damage and problems with the foundation, this contingency might allow you to withdraw your purchase offer.

Home inspection contingencies can also make distinctions between less expensive and more expensive repairs, which can be defined by a dollar amount or percentage of the sale price.

What Is a Kick-out Clause?

A kick-out clause is a kind of contingency a homeseller might include when they accept your offer. A kick-out clause allows the seller to keep the property on the market and review offers from other buyers during the contingency period. If, during this time, the seller receives an offer with fewer contingencies or better terms, they can withdraw their acceptance of your offer and accept another offer instead.

Are Including Contingencies in Your Purchase Offer a Good Idea?

There are pros and cons to including contingencies in your offer to buy a home. They can protect you from financial risks and the costs of expensive repairs, but they can also make your offer less attractive to sellers. Think about what makes sense for you and consult a real estate professional to help you decide!

Last reviewed and updated August 2024 by Freedom Mortgage.