Buying a home can be complicated and time consuming. When making an offer on a home to buy, a contract to purchase is usually prepared. In addition to different types of mortgage and the amount of down payments, home buying contingencies are an important part of a home purchase agreement. Knowing what the contingencies are can help home buyers avoid problems during the home buying process.

Home Buying Contingencies Defined

The contract between a home buyer and home seller is called a home purchase agreement. A standard home purchase agreement contains clauses called "contingencies." The contingencies are protections for the home buyer. Each contingency allows the home buyer to usually cancel the home purchase agreement without financial penalty if certain conditions are not met. In order for the home purchase agreement to proceed past certain milestones in the escrow period, the contingencies are waived or satisfied by the home buyer or seller.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.

Most Common Contingencies

There are three common contingencies that most home buyers usually include in their home purchase agreements.

Home Inspection Contingency

The home inspection contingency protects the home buyer from purchasing a property with defects. A home inspection contingency in the purchase agreement usually allows the buyer to perform, at their expense, an inspection on the home they are buying.If the home inspection reveals issues with the property, the home buyer may negotiate a lower purchase price, ask for other financial remedies or request that the home seller make the repair. If the buyer and seller cannot agree on a financial adjustment or if the seller is unwilling to make the repairs, the home buyer, in most cases, may cancel the home purchase agreement.

In some seller markets, where home inventory is very short, some home buyers will choose to waive the home inspection contingency. They do this to make their home purchase more competitive against other potential buyers for the same home. This can be an edge for home buyers who need to make a low offer or who want their offer to stand out in a competitive market. However, waiving the home inspection contingency can be a risky move. Some homes can have hidden problems that can be very expensive to repair. Home buyers who choose to waive the inspection contingency should first consult a qualified real estate agent and understand that their decision could lead to headaches down the road.

Appraisal Contingency

Before a mortgage can be funded, lenders usually require the home to be appraised to ensure that the value of the home is less than or equal to the purchase price. If the appraisal reveals that the home is worth less than the offer made on the house, the lender will reduce the amount of the loan by the same amount. This could require the home buyer to put forward more money for the purchase of the house.

In most cases, the appraisal contingency may allow a home buyer to renegotiate the purchase price of the home if the home appraisal is lower than the purchase price. If the home seller and the buyer are not able to agree on a new price, the appraisal contingency may allow the home buyer to walk away from the purchase of the house.

Financing Contingency

For home buyers not paying all cash for a home, they must obtain mortgage financing. Most mortgage lenders do not begin a very detailed review of the borrower until a home purchase agreement has been signed by both the buyer and seller. A financing contingency is often included in a purchase agreement to protect the buyer and seller, should the lender not eventually fund the loan. If the loan does not fund, the financing contingency usually allows the home buyer to cancel the purchase.

Get Help From Your Real Estate Professional

In addition to those contingencies listed above, there are many others. Some are very time sensitive while others can be quite complicated. If you are a home buyer who wishes to purchase a home in the coming months, you should speak to an experienced Brentwood real estate professional about contingencies and the home buying process.

For informational purposes only. Always consult with a licensed mortgage professional before proceeding with any real estate transaction.