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What Is a Contingency?

Buying a house is a huge deal—both figuratively and literally! It’s probably the most expensive purchase you’ll ever make. Not only does it cost a lot of money, but it’s also a big emotional investment. This could be the place you raise your kids! You want to make sure everything goes as smoothly as possible. 

When the seller accepts your offer, you’ll enter into a contract to buy the house. And good heavens,this contract is massive. It covers everything from the agreed-upon price to the date you pick up your keys. And if your real estate agent is doing their job, it will also include some contingencies. 

Wait. What? That’s right: Most home sale transactions usually come with a few strings attached to make sure both parties are getting what they need. 

At this point, you may be asking yourself, What kind of contingencies? That’s a great question! Let’s get into it. 

What Are Contingencies? 

Real estate contingencies are contractual conditions that must be met in order for a home sale to go through. They protect the buyer and seller from things that could go wrong in the transaction and help to ensure that you can walk away from a deal without losing your shirt. 

Wait, Is Contingent the Same as Pending? 

Not quite. Here’s the difference between contingent and pending. Remember how contingencies mean that certain conditions must be met for the sale to get the green light? Well, if a home is pending, it tells you that the contingencies were in fact met and all signs point to a successful closing—it just hasn’t happened yet. 

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Technically, both contingent and pending statuses mean the homes are still “active” or on the market. That means that an offer has been accepted, but another buyer can submit a backup offer just in case the sale falls through—which happens sometimes with contingencies but is pretty unlikely if pending status is reached.  

What Are Common Types of Contingencies? 

There are four main contingencies written into most real estate transactions: appraisal, home inspection, financing and home sale contingencies. Each of these is important to a sale contract. Let’s take a closer look at them: 

1. Appraisal 

No one wants to pay too much for a house (obviously). An appraisal will make sure you know the fair market value of the house before the sale closes. If the appraised value is less than the sale price, an appraisal contingency allows the buyer to back out of the contract or negotiate a lower price with the seller. Keep in mind that your lender won’t want to underwrite a loan for more than the house is worth. 

2. Home Inspection and Repairs 

A home may look fantastic on the outside, but it might need thousands of dollars of hidden work on the inside. And you don’t want to buy a housing lemon. With a home inspection contingency, you have the right to have a professional home inspection. Then, if the inspection turns up major problems—like a hole in the roof or a crack in the foundation—you can ask the seller to fix the problems, reduce the price, or cancel the contract. 

In a hot housing market, you might be tempted to throw caution to the wind and skip the home inspection contingency to make your offer more appealing. Well, we strongly recommend having a pro inspect the house first. Otherwise, you could end up paying too much for a home with expensive issues that could cost you thousands of dollars later. 

3. Financing 

A financing contingency gives the buyer a certain amount of time to get approved for a mortgage. Let’s be clear here: You need to be preapproved for a loan before you even make an offer to avoid trying to buy a home you can’t afford. Being preapproved also speeds up the loan-approval process once you do make your offer. But even with preapprovals, people get into housing contracts every day only to have their financing fall through at the last minute. That’s why this contingency comes in handy. 

Now, if you’re the type of buyer who pays cash for a home (our favorite type of buyer), you don’t need to include this contingency in your contract. Purchasing with cash can be a huge plus to sellers who don’t want to wait for a buyer to secure financing. 

If you do need to take out a mortgage, we recommend a 15-year fixed-rate mortgage with at least a 10–20% down payment. If you’re following our Baby Steps and are ready to buy a house, talk to our friends at Churchill Mortgage. They’ll help you get your financing ducks in a row so you’re ready to put your best foot forward! 

4. Home Sale 

Sometimes you need to sell your current house before you can buy a new one. That can be kind of rough for the seller, who might miss out on another offer while they’re waiting for you to close on your old house. Because of this, sellers usually attach a kick-out clause to this contingency. This is basically a sell-by date so the seller can move on if you can’t get your current house sold. 

It might make more sense to sell your house first and rent for a while. That way, you won’t wind up in a situation where you’re making two mortgage payments—and you won’t have to worry about this contingency at all! Win, win.  

Okay, those are big ones—and they’re all good reasons to work with an all-star real estate agent. Because if any one of these contingencies is left out of your contract, it could cost you thousands of dollars. 

Other Contingencies 

As you can see, the contingencies we’ve covered not only protect buyers, but benefit sellers as well. If all the conditions are met, the buyer can’t back out of the purchase without financial or sometimes legal consequences. 

However, you need to be cautious about using too many contingencies. While some are necessary, many sellers don’t want to deal with a buyer who puts conditions on everything. If your real estate agent knows what they’re doing and has the heart of a teacher, they’ll educate you on whether or not you should include certain contingencies. 

Here are some common ones, but be careful with too many: 

  • Title contingency: If there are problems with the title—like any liens or judgments against the property—it gives the buyer the option to walk away instead of dealing with any contested ownership claims. For example, that can happen if the house is being sold as part of a will or divorce—and things can get ugly. The last thing you need to deal with in your new home is 17 distant cousins of the previous owner coming out of the woodwork and claiming they own the home you just bought. We also recommend title insurance to protect you from any unknown catastrophes in this area after the sale. 
  • Insurance approval:  Apply for insurance as soon as you put down your earnest money! Why? If you find that you can’t get insurance for some reason (or the insurance is outrageously expensive), you should be able to walk away. Things like previous claims for mold or an old roof can make a house difficult to insure. 
  • Final walk-through:  It’s common to take a final walk-through the day before closing. Do not skip this step! You want to make sure there hasn’t been any serious damage to the property since you entered into the contract. You’ll also want to check that all agreed-upon repairs have been made. If you show up for the walk-through and it looks like a college fraternity just finished an initiation ritual in the living room, you should have the option to back out. 
  • Attorney review:  You may wish to include a clause that allows your attorney to review the contract for a period of time before closing. They can make sure nothing has been removed or sneaked into the contract without your knowledge and that everything is kosher before closing. 

Ready to Buy a House? 

If you're ready to take the plunge and buy a house, talk to one of our real estate  Endorsed Local Providers (ELPs). They’re experts at finding houses for people just like you, and they’re invested in their neighborhoods—the neighborhood where you’re shopping for a home! 

Our agents are top-notch and can walk you through every step of the process—from finding a house and making an offer to ensuring that any appropriate contingencies are included and met. 

Find a real estate ELP today! 

 

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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