When you place an offer on a home, you are essentially writing a purchase contract that the seller may agree to, or counter with changes. Once the price and terms of the home sale are mutually agreed upon, the purchase offer becomes a binding contract.
For this reason, having the right contingencies in place are absolutely essential when you buy a home! Without contingencies, you could be legally obligated to complete the deal, even if something beyond your control happens – such as your financing falling through.
Buyer contingencies are not a magic wand, however. Nor are sellers obligated to agree to all of them. Too many contingencies can cause a home seller to refuse an offer. Too few contingencies can mean inadequate contractual protection.
Here are 5 smart contingencies that home buyers should consider. Your Exclusive Buyer Agent will provide you specific advice based on your personal situation!
1. Financing contingency. If you are relying on a mortgage to complete the home purchase, a financing contingency is a must! In a rising-rate environment, your financing contingency can also be used to keep you from being forced to accept a more expensive mortgage, if your original financing falls through.
For example, the financing contingency could read, “Subject to final mortgage approval and funding from ABC Bank, with an interest rate not to exceed 5% for a 30-year, fixed-rate Conventional mortgage, with a principal balance of $205,000.”
2. Homeowner’s insurance/flood insurance coverage contingency. If the home you’re purchasing has a lengthy or expensive claim history, or is located in a flood plain, or located in an area prone to natural disasters, you could be surprised by very expensive insurance premiums, or by difficulty in obtaining insurance at all.
3. Home inspection contingency. This basically says that the home purchase is subject to a satisfactory home condition report, completed by a home inspector of the buyer’s choosing. If you are concerned about specific issues, such as water quality, pest infestation or radon, you can add inspection contingencies for these areas as well.
4. Appraisal contingency. Sellers can be more optimistic about market value than what the bank appraisal will justify. When the appraisal falls short of the sales price, it can ruin your financing approval, unless the seller lowers the price, or you make a larger down payment to cover the difference. With an appraisal contingency, a low appraisal is not going to be your problem to solve. It puts the ball in seller’s court, to either reduce the sales price accordingly, or allow you to exit the deal.
5. Occupancy contingency. If you need to take possession of the home as of the date of closing, or by a specific date in advance of the closing, put this stipulation in your offer. While sellers rarely offer occupancy in advance of closing, it may be allowed under certain circumstances, especially if the property is vacant. And while buyer occupancy of the home as of closing is customary, more sellers are seeking to extend their own occupancy. This is known as a sale-and-leaseback, and it can be detrimental to your interests!
This is just a sampling of the contract contingencies that protect home buyers. Working with an Exclusive Buyer Agent is the best way to ensure that your purchase offer is written with your best interests in mind! Find an EBA in your area today!