Buying a home means more than negotiating a sales price. You have to work out other important details that sometimes are even more important than the price you pay. You need what they call contingencies in your contract. Without them, you leave yourself at risk for serious issues.
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Contingencies help give you a way out of the purchase contract should you decide you don’t want it anymore. Typically, when you buy a home, you pay earnest money up front. Otherwise known as a good faith deposit, this money helps the seller know that you are serious about buying the home. Without this deposit, any buyer could back out of the contract without any consequences. With earnest money down, if you bail on the contract, the seller can keep your earnest money.
Luckily, there are a few ways to protect yourself. Don’t enter a purchase contract without the following contingencies:
HOME INSPECTION CONTINGENCY
When you buy an existing home, you want to know that it’s in good condition. The appraiser just looks at the surface stuff – he doesn’t dig deep to make sure the electrical wiring is good or the utilities have life left in them. That’s the inspector’s job. After the inspector evaluates the home, he’ll provide you with a report that tells you everything that is wrong with the home.
If the inspector finds something wrong with the home, this is your chance to back out of the purchase. Typically, homeowners back out of the purchase when the inspector finds ‘major’ things wrong with the home. Repairs that the seller can do or give you a quick credit for at the closing typically don’t matter. It’s the repairs that cost thousands of dollars that neither you or the seller want to cover that can kill a sale.
HOME APPRAISAL CONTINGENCY
Your lender will require a home appraisal to make sure the home is worth enough for them to lend you the money. You can use the appraisal to your benefit too. If the appraiser decides the home is not worth as much as you bid, you have a way out with the appraisal contingency.
You can either negotiate a lower sales price with the seller based on the appraisal or you can back out of the sale completely. As long as the appraisal is done before the appraisal contingency expires, you can back out of the contract without any consequences.
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Even if you have a pre-approval from a mortgage lender, there’s still a chance your financing could fall through the cracks. With a financing contingency, you have the option to back out of the contract if you can’t secure financing by a certain date.
You only get a specific period to use the financing contingency, so it works in your benefit to work fast. Provide the underwriter with a complete underwriting package. Also, make sure that you answer his/her calls and request right away. If the mortgage falls through after the contingency expires, you are on the hook for the mortgage or at the very least, to lose your earnest money.
SALE OF HOME CONTINGENCY
If you own a home now that you have to sell, it can hurt your chances of buying the home if you can’t sell your current home. If you know you need the proceeds of the sale to follow through on the purchase, you need the sale of home contingency. This helps you have a way out should you be unable to sell your home.
Like all other contingencies, you only have until a certain date to use the contingency. If you don’t sell your home by then, you should back out of the contract. If you don’t and you still don’t sell your home, you will either lose your earnest money or be on the hook for the purchase.
These contingencies help you avoid the risk of losing your earnest money. If you decide to back out of a purchase, one of these contingencies can help you. If you don’t have the right contingency or you miss the expiration date, be prepared to lose your escrow money and possible have legal battles with the upset seller.