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How Contingency Removals Work in the Home Buying Process

If you’re looking to buy a home, you will find it useful to familiarize yourself with home buyer contingencies. Here’s everything you need to know before getting the ball rolling on your next big purchase.
If you’re looking to buy a home, you will find it useful to familiarize yourself with home buyer contingencies. Here’s everything you need to know before getting the ball rolling on your next big purchase.

In real estate, a contingency refers to a condition of the Agreement of Sale that needs to occur in order for the transaction to keep moving forward. If you’re in the process of buying a home, you’re likely to come across some various types of contingencies.

Common Home Buyer Contingencies

As the buyer, there are many contingencies that you can choose to include in your contract. That’s why it’s important to learn about the different types of contingent offers and what they could mean for you.

Inspection Contingencies

A home inspection contingency is probably the most common type of contingency there is. These contingencies protect the buyer, in the event that the home inspector uncovers something detrimentally wrong with the home during the inspection process. Additionally, an inspection contingency gives a prospective buyer the opportunity to be sure they know exactly what they’re getting before the purchase has been finalized.

As the home buyer, you have the right to hire a home inspector to conduct a complete inspection of the home you are looking to purchase. If buyers issue a Request for Repair, the seller must receive a copy of the home inspection. In some cases, the seller may be entitled to the home inspection regardless. A home inspection contingency is usually satisfied and released early on in the purchase contract.

There are a number of different types of inspections you can have done on your next potential home, such as the general home inspection to more detailed inspections that look at things like mold, potential damage from insects, a cracked foundation, or annual flooding.

In the event that the inspector finds an issue, the buyer can ask the seller to fix the issue, or back out of the purchase. It’s rare for a buyer to waive a home inspection contingency, and we certainly don’t advise it. As the buyer in this scenario, you should always insist on having an inspection done.

Appraisal Contingencies

An appraisal contingency states that the home purchase will proceed only if a third-party appraisal of the home is successful. In order to be considered successful, an appraisal will need to show that the fair market value of the home is equal to or greater than the seller’s asking price. Appraisal contingencies are used by buyers to ensure that the property they’re considering purchasing is worth as much as the seller thinks it is.

To substantiate the purchase price, buyers who obtain a loan will be required by the lender to pay for an appraisal. Sometimes, a low appraisal is received.

Mortgage Approval Contingencies

A mortgage approval, also known as a financing contingency, is another important contingency that protects home buyers. A financing contingency ensures that the buyer is able to secure financing before they officially purchase the property. That way, if the buyer is unable to find a mortgage or other financing for the home, they aren’t legally obligated to go through with the sale.

Home Sale Contingencies

Home sale contingencies fall into two categories: sale and settlement contingency, and settlement contingency. Both types are for home buyers who are also sellers.

A sale and settlement contingency is for a buyer who’s selling their home but has yet to receive an offer on their existing property. Basically, it states that the buyer wants to buy a particular home, but needs to make sure they can sell their current home first.

A settlement contingency is in place for buyers who are selling their home, but are a little further along in the process. With a settlement contingency, the buyer’s current home is under contract, but they need to wait until after the closing to proceed with the purchase of their next property.

Early Occupancy Agreements

Contracts can be contingent upon the buyer and seller entering into a written agreement that allows the buyer to rent the property before the close of escrow. This is known as early buyer possession. It is common in many areas for the seller to stay a few days after closing.

Contingency Removals

The contingency removal date is the date defined in the offer when the buyer will remove contingencies and commit to a firm intent to close escrow.

Passive Contingency Removal

If you’ve opted for passive contingency removal in the purchase offer, your contingency provisions will expire when the specified deadline passes. For example, a passive contingency removal condition may require the buyer to update the seller on financing approval no less than 20 days before the scheduled expiration date. Buyers that are not able to arrange financing approval before this deadline can no longer exit the sale contract without penalty.

Active Contingency Removal

Buyers that elect for active contingency removal have more robust protection against financing delays or denial. An active contingency requires the buyer, not the seller, to set the removal requirements for the loan contingency. Although this option requires more paperwork from both the buyer and the seller, it is a safer way to secure your earnest money deposit.

If you’re looking to purchase your next humble abode, an experienced, local Clever Partner Agent can help you make the best decisions possible regarding contingency removals.

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Reuven Shechter

Reuven Shechter is the Outreach Coordinator at Clever Real Estate, the free online service that connects you with top real estate agents to help save on commission. He spreads the word about Clever, disseminating studies to journalists and developing relationships with media outlets. Reuven is passionate about investing in real estate and creating lasting success for families. His writing has been featured in Max Real Estate Exposure, Leverage Marketing, and more.

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