A standard home purchase agreement typically includes contingencies. Those are clauses that state that the parties must meet certain conditions for the transaction to go forward. If the contingency terms are not met, the contract is no longer enforceable and one party may even back out of the deal.
Types of Contingencies
Purchase contracts typically include an appraisal contingency. A lender won’t approve a mortgage for an amount greater than a home’s appraised value. If a home appraises for less than the agreed-upon sale price, the buyer can put a larger sum down, ask the seller to reduce the price or walk away.
A buyer will usually have to get financing to buy a house. A mortgage contingency will state that the buyer has a specific window of time (usually 30 to 60 days) from the date of the purchase agreement to line up a home loan. The agreement may also include a maximum interest rate and fees to make sure that the buyer can get a mortgage with affordable terms. If that isn’t possible, the seller can find another buyer who can secure a mortgage, and the buyer can find a more affordable house, save more for a down payment or work on boosting their credit score.
A home inspection contingency gives the buyer the right to have an independent inspector check the house for problems. Based on the findings, the buyer may decide to request repairs or a price reduction or walk away.
Some buyers request a home sale contingency that allows them to back out of a deal if they’re unable to sell their current home before buying a new one. That type of contingency is risky for sellers, so many won’t agree to it, but a seller whose house has been on the market for a long time may accept those terms.
Contingency Timeframes May Vary
The timeframe for each contingency may be different. For example, a contract may give the buyer more time to get mortgage approval than to have the house inspected.
In a buyer’s market, with more houses for sale than interested buyers, homeowners may have a hard time selling their house and may therefore be willing to agree to a longer contingency period, if the buyer requests one. In a seller’s market, a homeowner may prefer a shorter contingency period to avoid missing out on another offer if a deal falls through.
Individual factors may also come into play. For instance, a homeowner who has to sell quickly and move to start a new job may insist on a shorter contingency period. A seller who has more flexibility on a moving date may be willing to agree to a longer contingency period, especially if the buyer makes an attractive offer.