A contingency is a condition of a real estate contract that determines when and under what type of circumstances a buyer may cancel the contract. A contingency also regulates what happens to the buyer’s earnest money or any deposits in the event they cancel the contract. Once both parties (buyer and seller) come to an agreement, and there are no further changes to the contract, it will be ratified. All contingency deadlines start on the day of ratification.

Common Contingencies 

There are several different types of contingencies. For this article’s purpose, we will focus on the most common contingencies. 

Home Inspection Contingency

Also referred to as a Due Diligence Contingency, a Home Inspection Contingency allows the buyer an opportunity to have a home inspected within a certain time frame, generally 7-10 days. This inspection protects the buyer by allowing them to cancel the contract, negotiate any repairs needed, or negotiate a credit. If no agreement can be reached, the buyer has the option to void the contract within the Home Inspection Contingency period. 

Appraisal Contingency

An Appraisal Contingency is ordered by the lender to be sure the home appreciates for at least the sale price. Typically, appraisals are completed within 10 days.  If the appraisal comes back lower than the sales price, the contingency allows the buyer to request a lower purchase price. If the seller declines to lower the price, the buyer has the option of canceling the contract. 

Finance Contingency

A Finance Contingency, also known as a Mortgage Contingency, shields the buyer from losing their earnest money or any deposits if they are unable to secure a loan.  Most sellers investigate the buyer’s ability to complete the transaction before agreeing to a finance contingency. Usually, the buyer and seller agree on a time period for the buyer to secure a loan. Typically, a Finance Contingency is anywhere from 21 to 30 days. Because of COVID, some Finance Contingencies may be longer. Each situation is unique. 

Home Sale Contingency

A Home Sale Contingency is frequently included in a real estate contract. Many people are selling their home and searching for a new home simultaneously. However, in most situations, buyers will not be able to purchase the new home until their home sells. With a Home Sale Contingency established, the transaction is completely contingent upon the sale of the buyer’s home. Generally, both parties agree upon a specified date for the buyer’s house to sell allowing the contract to move forward. If the buyer’s home does not sell in the agreed-upon time, the contract can be terminated. 

Contingency Timelines

Anywhere between 10 and 30-day time frames are the general default for contingencies. However, either party can negotiate shorter or longer deadlines. In a competitive market, such as today it is not uncommon for parties to negotiate deadlines that work in both their interests.

If you are a buyer hoping to shorten contingency periods be sure to speak with your lender about the current time frame for loan approval and appraisal. Establish with your home inspector the time it will take to get an inspection report.

Removing Contingencies 

Removing the contingencies happen when everything agreed to comes to fruition. For example, if the seller agrees to everything on the Home Inspection Contingency, then the contingency is removed. On the other hand, if the seller doesn’t, the buyer can continue to proceed with the contract, counter-offer with an amended list, or choose to void the contract with no penalties. 

The party that makes the contingency (almost always the buyer) is the party who is allowed to default on the contract if the contingency is not upheld. Typically, if both parties want the sale to proceed. More than not they are able to come to a compromise. In cases where no agreement can be made, usually, real estate agents are able to negotiate a compromise. 

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Khalil El-Ghoul

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