A contingency in a real estate contract is an event or circumstance which must be met or rectified or the contract may become null and void. The contract allows for a certain period of time or until a certain date for these contingencies to be met. If they aren't met, the contract may be cancelled without any penalties to either party. Here are several types of contingencies you may encounter in your home-buying or selling process:
The Inspection Contingency
Every real estate contract should allow buyers to hire a professional inspection company to perform a thorough home inspection. Most houses have material defects and safety hazards that cannot be seen with the naked eye or that only home inspectors will find. Buyers and their real estate agents aren't trained or licensed to do home inspections, so these should be performed by a professional. There are a few different types of inspections that can be added to the regular home inspection. These include a radon inspection, a lead-based paint inspection, a mold inspection and an insect inspection. Buyers are typically given five to ten business days to have the inspections performed and notice or requests for repairs given to the sellers.
Attorney Review Contingency
In some states buyers and sellers use real estate attorneys to review their contracts and recommend changes. Typically, the allowable time-frame for the attorney review period is five to ten business days from the date the contract is signed.
The home must be appraised by an appraisal company that the buyer's mortgage lender hires. If the house doesn't appraise for the purchase price written on the contract, the buyers may not be able to acquire the mortgage. If the house doesn't appraise, the buyers and sellers can try to work it out. Options include but are not limited to reducing the sales price for the home or the buyer providing additional cash. Appraisals protect home values to make sure buyers aren't paying too much for the home.
After the appraisal is completed and the buyers have all of the necessary documents submitted to their mortgage lender, their file goes to underwriting for approval. The contract usually gives the buyers four to eight weeks to be fully approved for their mortgage or obtain their financing. Some types of mortgages take longer than others. In all cases, underwriters will look over buyer's documents and the appraisal to make sure home values are in line with other similar closed properties.
House to Sell or House to Close Contingency
In some cases a "house to sell" or a "house to close" contingency will be written into the sales contract. This occurs if the buyers have another house they own that they need to sell and close on before they are able to purchase their new home. This contingency protects buyers from having to move forward with a new home purchase and own two homes and pay two mortgages. Many times buyers cannot be approved for the mortgage on their new home unless they sell and close on the other home they own. In a sellers market these types of contingencies are not typical.
Real estate contracts may have multiple contingencies written in to them depending on the buyer's and seller's situations. The less contingencies there are, the better chance the contract will go to closing.