When a prospective buyer has found the right house and agreed to a price with the seller, the buyer can make a contingent offer. That means that the transaction will proceed, as long as specific contingencies, or conditions, are met. Those contingencies are essential to ensure that each party is aware of all relevant facts and able to make an informed decision. If the contingencies are not met, the would-be buyer can decide not to purchase the house and keep the earnest money provided.
The most important contingency from the buyer’s perspective is the home inspection. A professional inspector will thoroughly check the house for any problems that may not be readily apparent. An inspection should cover everything from the roof to the electrical wiring, plumbing, foundation and possible mold.
If an inspection discovers any cause for concern, the problem will need to be addressed. The buyer can ask the seller to fix the issue as a condition of sale, or the seller can decline to make repairs but agree to lower the sale price. If the parties are unable to reach an agreement, the buyer can decide not to purchase the house and walk away.
An appraisal is another contingency that’s designed to protect the buyer. An independent third party will calculate the current fair market value of the house. If the appraised value is less than the asking price, the buyer can renegotiate with the seller or walk away.
If the buyer loves the house and is willing to pay more than the appraised value, obtaining a mortgage may be problematic. A lender will approve a loan up to a percentage of the appraised value. If that number is less than the sale price, the buyer will have to make up the difference with a larger down payment.
If the buyer isn’t paying cash, an offer will be contingent on mortgage approval. A buyer may think he or she will qualify, but a lender can reject an application for a variety of reasons. A buyer who’s pre-approved for a mortgage may be unable to complete a purchase if the appraised value turns out to be lower than the sale price and the buyer is unable to come up with enough money for a bigger down payment.
A buyer who’s unable to obtain a mortgage can walk away. This contingency also helps the seller avoid waiting months for a buyer to get approved for a mortgage and having to turn down other offers in the meantime.
Discuss Contingencies with Your Agent
After a buyer and seller have agreed on a sale price, it’s natural to want to move quickly, but contingencies are designed to protect both parties. Whether you’re buying or selling a house, discuss the importance of a home inspection, appraisal and mortgage approval, as well as the potential ramifications of unforeseen problems in any of those areas, with your real estate agent.