Contingencies in Real Estate Contracts
Think of a Contingency as an Escape Clause
By definition, a contingency is a provision in a real estate contract that makes the contract null and void if a certain event were to occur. Think of it as an escape clause that can be used under defined circumstances. It's also sometimes known as a condition.
A typical contingency clause might read like this: "This contract is contingent upon Buyer successfully obtaining a mortgage loan at an interest rate of 6 percent or less."
If rates rise suddenly so this rate is longer be available, the contract would end. It would no longer be binding on either the buyer or the seller.
A number of very normal and common contingencies appear in most real estate contracts and transactions.
A contract will typically spell out that the transaction will only be completed if the buyer's mortgage is approved with substantially the same terms and numbers as are stated in the contract. In other words, if the contract specifies a down payment of 30 percent and a conventional 30-year loan, that's what should be approved by the lender. It's generally just a turn-down or approval for those terms, but sometimes a buyer will be offered a different deal and the terms will change. The loan type might also be specified in the contract, such as VA or FHA.
A buyer would not want to close on a home—and the lender definitely would not close on it—if the buyer was unable to get homeowner insurance. The buyer should immediately apply for insurance to meet deadlines for a refund of earnest money if the home can't be insured for some reason. Sometimes past claims for mold or other issues can result in trouble getting affordable homeowner insurance.
The deal should be contingent upon an appraisal for at least the amount of the selling price. Should the appraisal come in lower, another negotiation might become necessary to see if the seller will lower the price to make up the difference. If not, this could void the contract.
The completion of the transaction is typically contingent upon it closing on or before a specified date. Let's say that the buyer's lender has a problem and can't fund the deal by the closing/funding date cited in the contract. Technically, the seller can back out, although the closing date is usually just extended unless the seller has another higher offer waiting in the wings. Then he might want to leave the current deal so he can accept it.
The deal might be contingent upon the buyer accepting the property "as is." This is common in foreclosure deals where the property may have experienced some wear and tear or neglect. More often, there are various inspection-related contingencies with due dates and requirements that the buyer must accept the inspection results or object to them with terms for repairs. The seller can then either accept or reject those terms.
The closing will happen if the buyer is satisfied with a final walk-through of the property the day of or the day before closing. There would be problems should a light fixture, door, or included appliance was missing, or the property otherwise suffered some damage since the time the contract was entered into.
The Sale of Another Home
Sometimes the buyer is only able to close if he can get funds from the sale of his current home, which is usually under contract at the time he enters into the deal for the new home. The new deal is contingent upon that deal closing and funding. A seller might not accept the buyer's offer if it includes this contingency if he has others coming in.
Just About Anything
Either the seller or the buyer can propose almost any type of contingency in a contract negotiation, but that doesn't mean it will be accepted. Contingencies are common and normal in real estate transactions. They're usually just part of the process and everything moves along smoothly, but every now and then either the buyer or seller side can cause problems.