Step 13 to Buying a Home: The Importance of Contingencies
Contingencies are built into the purchase agreement to protect you from the unknown.
Contingency: [kuh n-tin-juh n-see] – noun, plural contingencies.
- dependence on chance or on the fulfillment of a condition; uncertainty; fortuitousness:
Nothing was left to contingency.
- a contingent event; a chance, accident, or possibility conditional on something uncertain:
He was prepared for every contingency.
- something incidental to a thing.
There are several key ones, including:
- The Loan Contingency: You’ve been pre-approved for the loan, but what happens if the lender uncovers something about the property or your credit that precludes them from making the loan? What is key here, is that the loan terms you include in the agreement are the loan terms that form the agreement. For example, if you write that the interest rate is to be no higher than 5% and while you’re in escrow the rate climbs to 5.25%, then you could use that as a reason to back out of the agreement. You would not be forced to, if you could still qualify at the higher rate you could choose to move ahead, but you would not be forced to.
- The Appraisal Contingency: The lender is going hire an independent appraiser to make sure the property is worth what you are paying. If the appraisal comes back below the purchase price, you could choose not to move ahead. Once again if you could afford to go ahead, you could choose to do so, but you would not be obligated to.
- The Inspection Contingency: This one is huge, the purchase agreement states that “the property is sold… “AS-IS” in its PRESENT physical condition” (Residential Purchase Agreement, Paragraph 11). You have the right to do all the non-invasive inspections you wish. The agreement states that you will do these within a specified time. Typically, you will have a Home Inspection, if the inspector sees anything that might be a “red flag” he will typically suggest that you have additional specialized inspections performed. In the past, the agreement included language about Termite, or pest inspections. These are now treated just like any other inspections, so if you want them performed you need to schedule them during the contingency period.
- Seller Reports and Disclosures Contingency: While the that “the property is sold… “AS-IS” in its PRESENT physical condition”, the seller is obligated to disclose any known defects to you, along with any other publicly known facts. The agreement gives the seller a specified number of days to give you these disclosures, but your response period begins upon receipt.
- HOA Disclosure Contingency: If you are purchasing a Condominium, the seller will need to request a packet of information from the Homeowners Association (HOA). Once again, your response period begins upon receipt.
- Sale of Buyer’s Property Contingency: If the purchase is dependent upon the sale of your existing home, we will use this contingency. It is far from simple and we will have a separate and extensive conversation in that event.
These are the main contingencies; however, your situation might require additional ones to be used. The key thing is that any one of these contingencies could be used to cancel the transaction, without prejudice in the event you can’t go through with the purchase.
Go back to Step 12 to Buying a Home: Tips for Reading the Inspection Report, go forward to Step 14 to Buying a Home: The Appraisal.