Understanding Home Purchase Contingencies

When buying a home, you can include contingencies in your purchase contract to protect yourself during the process.

A contingency is a condition that must be met for the contract to stay valid. If it is not met to your satisfaction, you can back out of the sale without penalty. While there are three main types, you can add other contingencies if the seller agrees.

Appraisal Contingency

Most lenders require an independent appraisal before approving a loan. This ensures the lender does not loan more than the home is worth.

If your contract includes an appraisal contingency, you can walk away and get your deposit back if the appraisal comes in lower than the agreed price and you cannot reach a new agreement with the seller.

Financing Contingency

If you plan to use a mortgage to buy your home, a financing contingency protects you. It allows you to back out of the sale and reclaim your deposit if your mortgage is not approved for the needed amount.

A preapproval or prequalification letter helps you know how much you can borrow, but approval is not guaranteed until underwriting is complete. This contingency ensures you are not locked into a contract without funding.

Home Inspection Contingency

A home inspection contingency protects you if the property has structural issues or damage. Most buyers cannot spot all problems, but a professional inspector can.

If the inspection reveals issues, you can:

• Negotiate with the seller to make repairs

• Ask for a lower sales price

• Use the contingency to cancel the sale and get your deposit back

This contingency provides peace of mind and safeguards your investment.

What Happens If the Appraisal is Too Low?

Lenders usually loan up to the appraised value. For example, if you agree on $500,000 but the appraisal comes in at $480,000, you have several options:

• Pay the $20,000 difference with a larger down payment

• Ask the seller to lower the purchase price

• Use your appraisal contingency to get your deposit back and continue your home search

Including an appraisal contingency can encourage the seller to negotiate rather than risk losing the sale. However, in a competitive market, leaving it out can make your offer more attractive to the seller, showing that you are ready to complete the purchase.