Finally, you have gotten to this point; you got pre qualified, pre approved, reviewed your credit report, reviewed your competing Good Faith Estimates, picked out your mortgage company and loan officer, selected your loan program, selected a real estate agent, spent hours of time looking at online home lists, reviewed hundreds of listings from your real estate agent, drank a lot of coffee, and now finally you got to the house – the house you want to buy.
Now what? Now it is time for the sales contract and contingency clauses.
When Making An Offer You Should Know About Contingencies
Probably the first and foremost tip in submitting a sales contract on a home that you should know about is read everything. Read all of the bold print and all the fine print. If your real estate agent brings over a contract that is already partially completed for your signature, make sure that you read through all the items that were skipped over, lined out, not checked etc. There might be something that you want and your agent didn’t know about that you could catch by reading the contract in its entirety.
Do not leave it up to your real estate agent to make sure that things are right for you. Remember, it is your money, your new home, and your financing so you need to make sure that you understand everything that is put in front of you for your signature.
There is no sugar coating reading everything. Some things are incredibly dry and boring, like attorney legalese normally is, but reading all of it can keep you out of trouble. A lot of the checked and unchecked items are items written into the sales contract that are called contingencies, or contingency clauses.
Beware of Contingencies
What are contingencies? Contingencies are like allowances or loopholes; they allow for you as the buyer and even the seller in some cases to back out of the sales contract without question if conditions about the property do not meet your expectations and get your deposit back. If it weren’t for contingency clauses buying a home on a sales contract would very risky.
When your contract is accepted, most of the time it is required that you put down a deposit. If something comes up with the home or your financing you should be able to get out of the contract. In most cases being able to back out is handled by contingency clauses, or contingencies.
Contingencies must be met for a sales contract to move forward. If you are not aware of the contingencies that are allowed on a sales contract then you could get yourself into a bind if you are not careful. This is why it is a good idea to read the standard sales contract in full for your state if applicable.
Common Contingencies On A Sales Contract
Contingencies are designed to primarily protect you the buyer against defects found in the property during the inspection period that follows after a sales contract is accepted by you and the seller. Some common contingencies are for the appraisal, termite or pest inspection, septic system inspections, home or engineering inspection, roof inspection, approval for financing, and the sale of the buyer’s home if applicable.
How Do Contingencies Work?
Contingencies can be written in several ways. One way to write a contingency is that it lets you as the buyer completely out of the contract if something was found during the inspection period that was not expected. An example of this might be that a home inspector during the home inspection found large cracks in the foundation and recommended that the foundation be fixed. Fixing a foundation can be rather expensive and not an expense that a new buyer would want to be stuck with.
This type of a problem with the home inspection would be ground for the home to not pass the home inspection. With a contingency clause saying that the home needs to pass the home inspection the buyer would have the opportunity to back out of the sales contract and be able to get their deposit back.
Contingencies Can Allow You To Renegotiate Your Sales Contract
A second way that a contingency could work is in the case where the appraisal doesn’t at least match the sales contract price. Mortgage financing is based on the appraised value or the sales contract price whichever is less.
- For example, take the case that we have a sales price of $200,000 and the appraisal comes in let's say $5,000 less than the sales price at $195,000. A mortgage lender is then going to base their financing on the $195,000 appraised value instead of the $200,000. With this being the case, the home buyer would have to come up with the extra $5,000 to make up the difference between what the mortgage covers and what the seller is expecting to get with their sales price unless there was a contingency in place.
With a contingency to protect the buyer against this, it is likely that the sales price would be lowered to match the appraised value and the purchase contract can continue.
This contingency could also protect the seller giving them the option of not accepting the lower price and letting them back out of the deal too. In either case, depending on how the contingency was written the buyer could get their deposit back if the contract was cancelled.
With your money at risk during a home purchase, it is extremely important that you cover yourself and read the sales contract from beginning to end. Don’t skip sections that your agent might just gloss over as standard disclosures and clauses. Take the time to read it as there might be something in it that you either don’t understand or really do want to address. Take your time, ask questions and you’ll know when it’s time to sign on the dotted line to submit your offer. Good luck.
