6 Common Contingencies in Homebuying Explained

Nothing’s quite as exciting as learning your offer on a home has been accepted. But what if problems crop up with the home inspection, appraisal, or mortgage application that demands you walk away from the sale? This uncertainty is why buyers are urged to protect their ability to cancel the sale by including appropriate contingencies in the purchase and sale agreement. Here’s how the six most common contingencies work — and how they can protect you if a sale goes awry.

What Is a Contingency?

A contingency is a condition that must be met to complete a home sale. Buyers ask for contingencies in their offer, and if the seller agrees, they’re included in the purchase and sale agreement — becoming part of the binding legal contract that governs the sale.

“A contingency is a get out of jail free card,” says Marisa Simonetti, a real estate investor with Simonetti Real Estate Team in Minneapolis. “It’s a stipulation that says that unless a specific condition is met, the buyer can back out of the agreement.”

Should unforeseen problems arise between signing the purchase and sale agreement and closing, contingencies allow the buyer to renegotiate the contract or back out without penalty. If you put down an earnest money deposit, canceling the deal under a contingency should get it refunded to you. The downside of contingencies is that asking for too many of them can make your offer less appealing to the seller — especially if you face competition from other interested buyers.

1. Appraisal contingency

An appraisal contingency protects you if the home is appraised for less than the purchase price. Lenders will not approve a mortgage for more than a home is worth, so a low appraisal may limit how much you can borrow. Without an appraisal contingency, you’d still be legally obligated to buy the home, which means you’d have to pay the difference out of pocket. But with this contingency, a low appraisal would allow you to cancel the deal and keep your earnest money.

2. Inspection contingency 

Mortgage lenders require a home inspection to document the home’s condition and whether it needs repairs or is unsafe to live in. If the inspection reveals problems you could not account for in your offer, you can ask the seller to make repairs or lower the purchase price to compensate. If they don’t want to, or the cost required to make repairs changes your mind about buying the home, an inspection contingency lets you cancel the deal and get back your earnest money deposit.

3. Mortgage contingency 

Most people need a mortgage to buy a home. A mortgage contingency — also known as a financing contingency — lets you cancel the sale if you can’t get approved for a mortgage. Even if you’ve been preapproved for a mortgage, the lender may reject your final loan application if you or your partner have lost your job or your credit score takes a sudden dip. This contingency allows you to walk away if you can’t get a mortgage.

4. Title contingency 

Lenders also require a title search to confirm the seller as the legal owner of the property and to document any outstanding claims or liens against the property. If the title search reveals unpaid property taxes or that someone besides the seller has a claim to ownership, a title contingency lets you back out of the deal.

5. Insurance contingency

You need to buy homeowners insurance to protect against losses or damage to the property from a disaster or accident. Lenders require insurance, but some properties are difficult or very expensive to insure — especially if they’re older, poorly maintained, or in an area at risk for storms, fires, flooding, or earthquakes. A homeowners insurance contingency lets you cancel the sale without penalty if you can’t insure the property.

6. Sale contingency 

If you already own a home, you may need to sell it to afford your new home. A sale contingency protects you if you can’t sell your current home in time to close on the new one. Some sellers might be unwilling to wait for you to sell and may not always agree to this contingency.

When To Waive Contingencies

In some cases, waiving certain contingencies can help you get your offer accepted by the seller. Be sure to discuss all of your options with your real estate agent before you waive common contingencies.

When to consider waiving the appraisal contingency

Waiving the appraisal contingency may make sense if you’re sure the home will appraise for at least the amount you’re offering.

“The appraisal contingency may be waived when you are confident that you offer is at or around market value and you have plenty of extra cash to make up the difference if the appraisal comes in low,” Simonetti says.

You also may want to waive this contingency if you have a mortgage contingency. Since lenders won’t approve a loan for more than a home is worth, you’d still be covered.

When to consider waiving the inspection contingency

It’s rarely a good idea to waive the inspection contingency, as homes that look perfectly sound often have hidden problems. If you waive this contingency, you’ll assume responsibility for making and paying for any repairs or required upgrades.

One instance where this may be less of a concern is if the home is new construction. “A home inspection contingency may be waived on a new build when the builder has a trusted reputation,” Simonetti says.

When to consider waiving the mortgage contingency

If you have mortgage preapproval, sellers may be less likely to object to this contingency. It also may make sense if you have strong credit, a decent down payment, and not much debt.

“A financing contingency may be waived when the buyer is preapproved and confident in their ability to perform,” Simonetti says.

When to consider waiving the sale contingency

If you’re sure you can sell your home quickly or can afford to pay for two homes at a time, you may want to waive this contingency. You may be able to rent your home for a time or secure a bridge loan to pay expenses until you can sell your old home.

When Not To Waive Contingencies

Contingencies are designed to protect you, so don’t waive them if you don’t have to.

Waiving the home inspection or title contingency can be particularly risky. Even if the home seems perfect from the outside, expensive problems might lurk beneath the surface. And you never know if a house has debts or an outstanding claim to ownership without a title search.

It’s also risky to waive the mortgage contingency. If you can’t get a loan, you’d still be legally obligated to buy the home without one.

FAQ: 6 Common Contingencies Explained

Here are answers to common questions about common homebuying contingencies.

The Bottom Line on 6 Common Contingencies Explained

Ideally, every home purchase would go smoothly for both the buyer and the seller. Unfortunately, problems can come up along the way, prompting you to reconsider buying the home and walk away from the deal. Making sure you have contingencies in your purchase and sale agreement will give you options and protect you from financial losses if the deal falls through.