Contingencies are clauses written in real estate purchase agreements and contracts that give buyers a way to “back out” if they decide they no longer want to move forward with the purchase. Contingencies are very common in California real estate contracts. There are three types of contingencies that are the most common for California buyers. Contingency periods can last from 5 to 30 days, and once contingencies are removed, a buyer is obligated to buy the property.
Inspection Contingency
An Inspection Contingency is a contingency based on the results of a home inspection. A home inspector checks the home for termites, other pests, mold, lead paint, and asbestos, as well as for electrical, plumbing, and foundation issues. After the home inspector’s report comes back, buyers have the option to negotiate for repairs, or walk away from the contract if they believe the inspection illuminates too many serious issues.
Appraisal Contingency
Appraisals are used to estimate a property’s value. Appraisers use the property’s location, condition, and the current market to determine its appraised value. The Appraisal Contingency allows the buyer to walk away from the purchase contract if the property’s appraisal comes in lower than the contract price and the seller is unwilling to come down from the contract price. If buyers decide to waive the appraisal contingency, they are agreeing to pay the full sales price—even if the appraisal comes in lower than the property’s contract price.
Loan or Financing Contingency
A loan contingency is put in place to protect buyers if they are unable to obtain mortgage financing for any reason. Most buyers in California are pre-approved before shopping for homes, but this contingency is still often necessary to protect California buyers if their qualification is particularly tight or complex. If buyers make offers with no loan contingencies and they are unable to qualify for financing, they risk losing their earnest money deposit.
Waiving Contingencies
Most real estate purchases successfully close without buyers backing out of a deal due to a contingency. These contingencies are in place to protect buyers from being forced to follow through with a purchase that may turn out to no longer make economic sense. The contingencies also protect buyers’ earnest money deposits. In competitive markets, some buyers choose to waive contingencies to make their offers more attractive to the sellers. It is, however, always best to consult an experienced real estate agent and lender before waiving any contingencies in a purchase contract.
Frequently Asked Questions
What are contingencies in a real estate contract?
Contingencies are clauses written into real estate purchase agreements that give buyers a way to back out of a contract without losing their earnest money deposit if certain conditions are not met. They are very common in California real estate transactions and typically last between 5 and 30 days. Once a buyer removes their contingencies, they are legally obligated to move forward with the purchase.
What are the three most common contingencies for California homebuyers?
The three most common contingencies are the inspection contingency, the appraisal contingency, and the loan contingency. The inspection contingency allows buyers to walk away or negotiate repairs if a home inspection reveals significant issues. The appraisal contingency protects buyers if the property appraises below the contract price and the seller refuses to reduce their price. The loan contingency protects buyers if they are unable to secure mortgage financing for any reason.
What happens if I waive my appraisal contingency?
Waiving the appraisal contingency means you agree to pay the full contract price regardless of what the home appraises for. If the appraisal comes in lower than the purchase price, you would be responsible for covering the difference out of pocket since lenders will only finance up to the appraised value. This is a significant financial risk and should be carefully considered before agreeing to waive this protection.
Should I waive contingencies to make my offer more competitive?
In competitive markets, some buyers choose to waive contingencies to make their offers more attractive to sellers. However, doing so comes with real risk. Waiving a loan contingency, for example, means you could lose your earnest money deposit if you are unable to secure financing. It is always best to consult with an experienced real estate agent and lender before removing any contingencies from a purchase contract.
Questions? Contact JVM Lending To Learn More
This blog covers just some of the basics of contingencies for buyers in California. To learn more about mortgage contingencies for California home purchases or to discuss your homebuying and mortgage financing options, contact our team by phone at (855) 855-4491 or by email at jvmteam@jvmlending.com. Our Client Advisors are available seven days a week and are experts at helping first-time homebuyers navigate the homebuying process.
