4 Important Contingencies You Should Include in Your Purchase Offer

Putting in an offer to buy a home is an exciting time. It’s also a very expensive time. Since a house is probably one of the most expensive investments you’ll make in your lifetime, it’s important that you proceed with caution.

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No matter how much you trust your real estate agent or how well you think you know the seller, there are reasons you should put contingencies in place. The right contingencies protect you should you decide or are forced to decide not to buy the home. With contingencies in place, you can back out of the purchase contract and keep your earnest money. Without the right contingencies, canceling a purchase contract could mean that you forfeit your earnest money.

There are four important contingencies you should consider adding to your purchase contract. Find out what they are below.

The Financing Contingency

Unless you are paying cash for the home, you should put in a financing contingency. This protects you in the event that you can’t get your financing to go through.

Borrowers lose mortgage approvals all of the time. Sometimes it’s expected while other times it comes out of the blue. Whether the lender can’t validate your income or they find a debt that puts your debt-to-income ratio over the limit, you could find yourself without the loan you thought was in the bag.

Once you sign a purchase contract, though, you are legally bound to make that purchase. If you have a financing contingency, though, you can back out of the contract if you don’t have a solid loan approval before the contingency’s expiration date. Now if you go beyond that date and then your financing falls through, you may find yourself losing your escrow money because the window of opportunity passed.

The Sale of Home Contingency

If you currently own a home and need to sell it to use the proceeds to buy the new home, you’ll want a sale of home contingency. This gives you a specific period to sell your home. This doesn’t mean physically close on the home, it usually means securing a solid purchase contract on the home. Once you have that contract, you can work to make the two closings coincide so that you can make the sale and purchase of a home seamless.

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Just like any other contingency, you have a specific period to make this happen. If you don’t sell your home within that time, you have the option to back out of the contract and keep your earnest money. If you back out of the contract after your contingency date, though, this protection won’t be there any longer. At that point, you may forfeit your escrow money.

The Appraisal Contingency

If you are securing financing, you’ll need an appraisal on the home. The appraisal is what lets the lender know that the home is worth enough to give you the loan you need. It does happen, though, where an appraisal comes back at a lower value than the seller and/or buyer thought it would. If the agreed upon sales price exceeds the purchase price, the lender won’t approve the loan.

This is where the appraisal contingency comes into play. This contingency gives you a little time to order and pay for the appraisal. The appraiser will then go out to the property, inspect it, pull up comparable sales, and create an appraisal report that will show how much the home is worth. If the home isn’t worth the amount you bid and you are within your contingency window, you may back out of the purchase of the home.

While the appraisal may seem as if it could crush your dreams of owning a home, it actually helps you. It makes sure that you don’t pay more for a home than it is worth. If the appraisal comes back low and the seller agrees to lower the price of the home, you may be in luck. If not, you are either on the hook for the difference between the loan amount and the purchase price of the home or you can walk away from the purchase, hopefully with your escrow money in hand.

The Home Inspection Contingency

Lenders don’t usually require a home inspection, but we highly recommend it. The inspection helps you know the state the home is in when you buy it. If there’s mold growth, pest infestations, flood damage, or inept wiring, this is something you would want to know, right?

The inspection contingency helps give you time to get the inspection done and for you to receive the report and make a decision. If the inspector found things wrong with the home, you need to decide if you are willing to accept the issues; if you want to have them fixed by the seller; or if you want to walk away from the home. If you do decide to walk away from the home, it should be within the allotted period of the contingency or you run the risk of losing your escrow money.

Contingencies are an important way to protect your investment in a home that you intend to buy. If things don’t fall into place and you just can’t buy the home, these contingencies give you a way out.

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