At Penn Street Mortgage, a Chester County mortgage company, our advisors can walk you through real estate contingencies and how they impact your transaction. Contingencies are a standard part of many real estate offers and often serve as protection mechanisms for buyers who set conditions around purchasing the house. They’re incorporated into your offer with the consultation of your real estate agent and lender, and the seller has the option of accepting or rejecting the contingencies as part of the negotiating process.
There are a variety of contingencies you could incorporate into your offer, each offering different protections and liabilities. Here are some of the most common home buying contingencies.
Home inspection contingency (Chester County mortgage company)
The most common type of contingency when buying a house is the home inspection contingency. Almost 80% of homebuyers include a home inspection contingency, according to the National Association of Realtors. A home inspection clause is written into a contract and allows the potential buyer to bring a certified home inspector in to look over the property and point out any issues with the home — both major and minor — before purchasing the home. This allows buyers to back out of a contract if they find that the home has significant issues or issues that they deem more expensive than they anticipated.
The home inspection covers a variety of categories, including major issues like foundation, roofing, electrical, plumbing, and the HVAC system. It will also cover smaller things like smoke detectors, and appliances, ensuring everything is up to code and in working order. Make sure to factor this added cost into your homebuying budget since inspections can cost up to $1,000 but offer you peace of mind in your purchase.
Appraisal contingency
An appraisal contingency is used to ensure the value of the property you’re buying is in line with the fair market value of the house. Lenders will usually require this to ensure the home is actually worth what you’re buying it for.
There are a few things that are used in appraisals to determine a home’s value — tax records, comparable recent home sales, and an in-person, third-party appraiser. Your lender will feel confident moving forward with the transaction if the appraisal comes back with the same value that you’re purchasing the home for.
If the appraisal comes back lower than what you’re purchasing the home for, you will have to discuss with your lender what your options are. As a Chester County mortgage company, Penn Street Mortgage is aware of the local market and how appraisals play into our buyer’s offers. If you have an appraisal contingency in place, and the appraisal comes back lower, you can often walk away from the contract without losing your deposit. Without this contingency, buyers won’t have the option to back out of the contract if the home is appraised for much lower than the purchase price.
An appraisal contingency is often required for a traditionally financed offer, but an all-cash buyer could also request an appraisal to ensure they’re paying a fair price.
Financing contingency
A financing contingency, sometimes called a mortgage contingency, protects a buyer by ensuring they can secure the appropriate financing for the home purchase. If a buyer is making an offer on a home with just a pre-approval from a lender, a mortgaging contingency can allow the buyer to back out of the contract, and receive their deposit back, if they are unable to secure sufficient funding for the home purchase. If both parties agree to the contingency, the buyer typically has between 30 and 60 days to secure financing. Since all-cash buyers aren’t using a lender, they will not have to implement a financing contingency, sometimes giving them an advantage in competitive offer situations.
It is recommended that most buyers at least secure a pre-approval before making an offer, which shows to the seller that a lender has at least provisionally approved that the buyer is able to afford the price of the home. Once fully approved for the mortgage, the buyer must provide the seller with a mortgage commitment letter from the lender, and then they are able to move forward with closing.
Home sale contingency (Chester County mortgage company)
In a home sale contingency, a buyer states that they are only able to move forward with the purchase of the property if their current home sells first. If the buyer’s home is not sold by a specified date, the contract can be terminated. This can prevent the buyer from carrying two mortgages and allows them to use the profits from their current home’s sale to purchase the new home.
While this contingency can be beneficial to buyers, it can be a risky contingency for the seller to accept, as there is often no guarantee that the buyer’s house will sell. The seller should take into consideration factors like if the buyer’s current home is already on the market and if it’s appropriately priced to determine the risk in accepting a home sale contingency.
Sometimes a kick-out clause is used by a seller that has accepted a buyer’s offer with a home sale contingency. A kick-out clause allows the seller to continue marketing the property and accept other offers from buyers.
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Contingencies are common in real estate transactions — They allow a buyer, and their lender, to feel confident that the home they’re purchasing is a good investment. Penn Street Mortgage is a respected and trusted Chester County mortgage company that can help guide you through the home buying process. Contact our team today to get started on your pre-approval process.