What are Contingencies?

Contingencies provide a way for one or both parties to back out of a real estate contract if certain specified conditions are not met. Common contingencies in real estate include an inspection contingency, appraisal contingency, loan/mortgage contingency, and sale of prior home contingency.

Common Types of Contingencies

Inspection Contingency

This clause involves the window of time the buyer has to get the property they plan to purchase professionally inspected. The home inspection helps ensure there are no serious issues, such as a leaky roof, faulty electrical system or structural defects.

Appraisal Contingency

This clause safeguards the buyer by stipulating that the property must appraise for the indicated sales price, at minimum, or the contract can be nullified. This is because banks don’t like to loan money to borrowers for a house that costs more than it’s worth. This clause may also indicate that the seller can opt to reduce the price to the appraised value.

Loan Contingency

Having a loan contingency clause in a home sales contract ensures that the buyer can get out of the purchase contract if something goes wrong in the loan approval or home inspection process. A buyer should make sure a loan contingency—also called a mortgage or financing contingency—is in their contract if they aren't sure they will be able to obtain a home loan.

Sale of Prior Home Contingency

This clause protects buyers who need the cash proceeds from the sale of their existing home to be able to afford a new home.

Key Takeaway

In the current market, contingencies can make or break an offer. We advise homebuyers to work with both their Realtor and mortgage advisor to establish what their recommended course of action is. In the end, it’s your choice whether or not to have contingencies written into your offer, but remember that waving certain contingencies does cause the homebuyer to absorb more risk in purchasing the home.