What is a Contingent Offer? What it Means When Buying a Home

A contingent offer means that an offer on a new home has been made and the seller has accepted it, but that the final sale is contingent upon certain criteria that have to be met. These criteria, or types of contingencies, are clauses in a sales contract that typically fall under three major categories: appraisal, home inspection, and mortgage approval.

Such contingencies are mainly put in place so that buyers can back out of a real estate sale sale if something goes wrong, usually without losing their earnest money deposit. A seller might entertain other offers after a refusal, but won’t deal with another buyer until the contingent offer is settled in one way or another.

Home inspection contingent offer

One of the most common contingencies for home buyers is the home inspection contingency. In this time frame, this contingency gives buyers the right to hire a home inspector and have their new home professionally inspected after putting down earnest money. And finalizing the real estate transaction usually hinges on this contingency. If something is wrong, a contingent offer allows the buyer to request that it be fixed and to renegotiate the price - or back out of the sale. It’s rarely advisable to waive an inspection contingency, and home buyers should generally consider this a must-have clause in a sales contract. 

If something is wrong with the current home on the real estate market, a good inspection will find it.

Appraisal contingency

With this real estate contingency, a third party hired by the mortgage lender evaluates the fair-market value of the current home for sale. In the even that the appraised value proves to be less than the sale price, the home appraisal contingency lets you back out of the deal.

It’s in no one’s best interest to overpay. If the home comes in under the asking amount, you have the right to back out.

In hot markets, potential buyers might feel pressured to waive a contingency, but they could end up paying more in the long run. The lender will only put up a certain amount of money for the appraised cost - which may not be the asking price - and the buyer will have to cover the rest to reach the purchase price.

For example, let’s say you qualify for a fixed-rate loan that covers 90% and you need to put 10% down for a new house selling for $500,000. If the property is appraised at $475,000, the lender is only going to cover 90% of that appraised value, or $427,500. In this case, instead of a $50,000 down payment, you would be expected to put down $72,500 to cover the difference. Waiving this contingency in the purchase contract can be a gamble. 

Mortgage contingency

You don’t want to sign a contract for a home purchase without having the money to back it up, or at the very least, a pre-approval. A mortgage contingency is a contingency that protects the buyer and seller from getting into a real estate sale without a proper loan. Under this contingency, the buyer has a specified period of time to obtain a loan that will cover the mortgage after the offer is accepted, If the buyer can’t get a lender to commit to a loan, the buyer has the right to walk away from the sale with the down payment.

To expedite the home buying process, know if you qualify sooner than later. If you’re pre-approved, you won’t be wasting the seller’ time or your during the loan-hunting period, which could take a couple of months.

Like an appraisal contingency, eager buyers and sellers in hot real estate market might want o waive the financing contingency for the current home for sale, especially if cash is on the table. But waiving this contingency means that if your mortgage lender delays or denies your loan after a seller accepts your offer, you can lose the deposit during escrow, so it’s a risky venture.

Works Cited:

Colley, Angela. “What Is a Contingent Offer? What It Means When Buying a Home.” Real Estate News & Insights | Realtor.com®, Real Estate News & Insights | realtor.com®, 29 Aug. 2022, www.realtor.com/advice/buy/what-is-a-contingent-offer/.