Protecting Yourself When Buying a Home: Understanding Contingencies
When purchasing a new house, buyers can include various contingencies in the offer contract. These are specific conditions that must be fulfilled for the deal to proceed. If a contingency isn’t satisfied and the buyer isn’t happy with the outcome, they can typically withdraw from the agreement without losing their earnest money deposit. While there are three primary contingencies commonly used, buyers can propose others as long as the seller accepts them.
1. Appraisal Contingency
Lenders almost always require an independent appraisal to confirm the property’s value before finalizing a mortgage. This protects the bank from lending more than the home is worth. With an appraisal contingency included, if the appraised value comes in below the agreed-upon purchase price, the buyer can renegotiate the price with the seller or back out of the deal while recovering their deposit.
2. Financing Contingency
Since most home purchases involve a mortgage, unexpected issues with loan approval can derail the process. This contingency safeguards the buyer if they can’t secure financing for the required amount—due to changes in credit, income, or lender requirements. Even with a pre-approval letter, full approval isn’t guaranteed until underwriting is complete. This clause lets the buyer exit the contract and reclaim their deposit if funding falls through.
3. Inspection Contingency
Many buyers worry about hidden problems like foundation cracks, plumbing failures, or electrical hazards. An inspection contingency gives the right to hire a qualified professional inspector to evaluate the property thoroughly. If significant defects are uncovered, the buyer can request repairs, a price reduction, or concessions from the seller. If no satisfactory agreement is reached, the buyer can walk away and get their deposit refunded.
What If the Appraisal Comes in Low?
Lenders generally limit the mortgage amount to the appraised value. For example, if you’ve offered $500,000 but the appraisal values the home at $480,000, the lender won’t cover the full $500,000. In this situation, buyers typically have these choices:
- Cover the shortfall themselves by increasing their down payment
- Negotiate with the seller to reduce the sale price to match the appraisal
- Invoke the appraisal contingency (if included) to cancel the contract and recover the deposit
Including this contingency often motivates sellers to drop the price rather than lose the buyer entirely. It provides leverage for the buyer. However, in hot markets with multiple competing offers, some buyers waive this contingency to make their bid stand out, signaling to the seller that they’re committed regardless of the appraisal result.
Contingencies offer valuable protection for buyers, especially first-time ones, but their use depends on market conditions and negotiation strategy. Always consult a real estate professional or attorney for advice tailored to your situation.
