This is Part 11 in a series of posts about how to tackle the home buying process.
Contingencies have been mentioned in previous posts, but what do they really mean? Contingencies are a common but not a required part of the contract and, as discussed, shortening or eliminating a contingency can even make an offer more desirable to the seller. However, a contingency is an important way to protect the buyer from defaulting on the contract. The contingency period begins the day after contract ratification (when both parties have signed the contract). Let’s take a look at the 4 main contingencies involved in a standard contract:
1. Home Inspection contingency – Allows the buyer to go through the home with an inspector and then negotiate repairs with the seller. It also allows the buyer to void the contract if an agreement on repairs cannot be reached, or if the buyer deems the repairs to be more than they bargained for. The inspection can take anywhere from 2-4 hours and can cost anywhere from $300-1,000, depending on the size of the home. Payment is typically expected at the time of the inspection. Your agent will accompany you during the inspection, but the home inspector will take the lead. Keep in mind – every home has been lived in and no home is in perfect condition, so some issues are to be expected. Your agent will help you determine which issues, if any, are worth negotiating with the sellers.
2. Radon contingency – Allows the buyer to have the home tested for radon. It is not uncommon to find radon in a home in this area, and it can be remedied. Like the home inspection, this contingency allows the buyer to request remediation if radon is detected, or void the contract if an agreement on remediation cannot be reached. The radon test is usually dropped off at the home inspection and picked up a few days later. You can read more about radon here.
3. Appraisal contingency – Gives the buyer the option of making up the difference or voiding the contract if the appraised value comes in below the loan amount. Example: You have been approved for a $380,000 loan. You have found a $400,000 home and so you are making a down payment of $20,000. However, the home only appraises for $370,000. Your new loan amount can now only be $370,000, so you must come up with an additional $10,000 in down payment money to make up the difference. This is one reason that higher down payments are helpful because the more cash you put down up front, the less likely you are to have an issue with the appraisal. The appraisal can cost anywhere from $200-$800 depending on the size of the home, and payment is typically due before settlement.
4. Financing contingency – Allows the buyer to void the contract if the loan cannot be approved. However, the buyer must have made every effort to apply for, secure and meet all the loan requirements in a timely manner. In other words, the loan disapproval cannot be due to buyer negligence. This is one big reason why it is important to disclose everything to your lender upfront, follow all of their instructions, and choose someone reputable!
Once each contingency period expires, the buyer must indicate whether or not they are moving forward to settlement, otherwise the seller has the option to give notice to void the contract. Your agent will counsel you on the best way to structure your contingencies when writing the offer.
Stay tuned for next week’s post which will discuss the new home construction process.