Why Contingencies are a Must When Buying a House
Making an offer on a house without any contingencies is a big risk for a buyer. Contingencies protect the buyer in the event something goes wrong.
There are a few contingencies that sellers expect to see with an offer, although in a hot market, some sellers prefer to see no contingencies in place. Before making an offer on a house, consider adding in these basic contingencies.
How Contingencies Help
A contingency is a fall back for a buyer if something does not pan out as expected. It halts the process of the contract and becomes legal if there are not specific circumstances met. There are common contingencies that help protect a buyer from getting themselves into a tricky situation.
The first is a contingency of appraisal. With this contingency in place, the appraised value of the house must come back to at least the amount of the sale price. This is important when a buyer is using a mortgage to purchase the home.
The second is a contingency of finance. This is very similar to the first contingency, and focuses on the lender that is financing the loan.
The last is a contingency of inspection, which states the home must be able to pass an inspection.
Getting an Appraisal
Most lenders will send a licensed appraiser to the home to determine the fair market value. This value depends on the condition of the house, where it is located, and how much other homes in the area are selling for.
Some homeowners do not research a house and the neighborhood before setting a price. Their sale price may come back higher than the appraised price. In this circumstance, the buyer will not be able to secure a loan high enough to cover the full value of the home. If they do not have extra cash to put down as a down payment, they must walk away from the deal.
How is a Finance Contingency Different?
A contingency based on finance is just as effective as an appraisal contingency. It allows a buyer to walk away from a deal if the appraisal turns up lower than the sale price. A lender always has the right to refuse to offer more money on a mortgage. However, a seller may still ask a buyer to continue with a deal by putting a larger amount of money down.
Without having a contingency in place, the seller may ask the buyer to put this extra cash down, even if the buyer does not have the money. If the buyer cannot come up with the money, they are breaching their contract and they will not get their deposit back. This is why it is important to always have at least one contingency in place.
Contesting an Appraisal
If a buyer or seller truly believes that an appraisal is too low, they can contest it. Simply contact the lender that hired the appraiser and ask them to assess the home again. They will typically ask a new appraiser to walk through the home to get a second opinion of the value.
Giving specific reasons for why the value should be higher can be helpful. If there is anything that was noted or not noticed by the first appraiser, be sure to point these items out. The second appraisal can show the value as higher and allow a buyer to obtain a loan.
Contingencies are needed when selling or buying a home. There are legal instances where the respective party can walk away with no financial obligation to the house or another party. When contingencies are not put in place, there is potential for money to be lost on a house that does not meet expectations. Only forgo contingencies after careful thought and deliberation.