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Real estate contingencies: What they are and how they protect buyers
With any luck, the time between making an offer and closing on a house will be smooth sailing. However, there are plenty of things that could go wrong, big or small. That’s why many buyers include contingency clauses in their offers — these conditions can protect buyers if something unforeseen happens before closing day.
So, what does “contingent” mean in real estate, and how do contingencies affect your offer? Understanding contingencies will prepare you for the last leg of your home-buying journey.
Learn more: Closing on a house — What to expect and how to prepare
In this article:
Contingency meaning in real estate
As a general term, contingent means “dependent on or conditioned by something else.” In the context of real estate, it means that although the seller has accepted an offer, the final sale will only go through if certain conditions are met. These conditions can be anything from the home buyer securing financing to the home passing an inspection or the buyer selling their current home.
Contingency clauses are essentially a safety net for buyers, allowing them to withdraw from the deal if unexpected issues arise.
Read more: How to make an offer on a house
Common real estate contingencies
Real estate contingencies allow buyers to walk away from a deal if a specific condition is unmet. Here are some of the most common ones:
Mortgage contingency
A mortgage contingency (or financing contingency) clause gives home buyers a certain amount of time — typically 30 to 60 days — to secure financing. This clause protects both the buyer and seller in case a mortgage loan falls through, or the buyer can't qualify for financing and is unable to buy the property without a loan.
Dig deeper: How to get a mortgage
Appraisal contingency
If you’re financing a house with a mortgage, you may want to include a home appraisal contingency clause in your home purchase contract. Here’s why: Mortgage lenders typically won’t let you borrow more than the home’s market value. If your home appraises for less than the offer amount, you'll have to make up the difference out of pocket. Otherwise, your financing may fall through. In this case, an appraisal contingency lets you back out of the deal if the home doesn’t appraise for a specific amount.
Home inspection contingency
An inspection contingency — sometimes called a due diligence contingency — lets you terminate your contract if your home inspection reveals specific issues with the property and the seller is unwilling to resolve them or renegotiate the purchase price. Without this clause, you essentially agree to buy a property without knowing all the details about its condition.
Learn more: Your home inspection checklist
Home sale contingency
Many home buyers also include a home sale contingency in their contract that allows them to withdraw an offer if they cannot sell their current home within the specified period. This contingency clause makes sense if you need money from selling your existing home to finance the purchase of a new one.
Title contingency
Any issues with the title can make it risky for you to buy a home. With a title contingency, you’ll have the right to withdraw from the contract if there are specific issues with the title, such as liens or easements.
Dig deeper: How a property title search works when buying a house
How long is the contingency period on a house?
A contingency period usually lasts up to 60 days, though the exact amount of time depends on the type of contingency. You can back out of the deal without penalties if specified conditions are not met during this timeframe.
For example, an inspection contingency period is typically shorter and lasts between 10 to 14 days. On the other hand, a mortgage contingency period usually lasts between 30 and 60 days to give the borrower enough time to secure financing.
Read more: How long does it take to close on a house?
What happens if contingencies are not met?
If contingencies are unmet, the home sale won't proceed under the agreed terms. In this case, the buyer can legally withdraw from the deal without financial repercussions, and the seller can move on to a backup offer. The buyer will most likely be refunded their earnest money deposit as well.
How real estate contingencies protect buyers
Because a real estate purchase contract is legally binding and can be costly to break, buyers often make contingent offers to protect their interests in case unexpected issues arise. If certain conditions are not met within the timeframe specified in the contingency clause, the buyer can legally break the contract and walk away from the real estate transaction without financial consequences.
How real estate contingencies affect sellers
While contingencies protect buyers’ interest during the home-buying process, they can make things a bit risky for sellers since there’s no guarantee that the home will sell. This is why including too many contingency clauses in your contract can sometimes work against you, especially in a strong seller’s market with competitive bidding wars.
Sellers want certainty just like buyers do. If your offer includes many contingencies, you might find it challenging to get your offer accepted in a sea of competing bids.
Make sure to have a professional by your side to help you draft any offer — especially one with contingencies. A knowledgeable Realtor or attorney will have a deep understanding of the local bidding competition and can offer strategies to appeal to the seller while still protecting your investment with the appropriate contingencies.
Learn more: What does a real estate agent do?
Real estate contingency FAQs
What are the most common contingencies in real estate?
Some of the most common contingencies in real estate include appraisal, inspection, mortgage, title, and sale of prior home contingencies.
What is a 10-day contingency in real estate?
In real estate, a 10-day contingency refers to a condition set in a purchase agreement that must be met within 10 days.
Why would a buyer choose to use a contingency?
Buyers often choose to include a contingency in their home offer because it allows them to legally withdraw from the transaction or renegotiate the terms if the specified conditions are not met.
What are the disadvantages of a contingent contract?
One of the most significant downsides of a contingent contract is that it can reduce the appeal of a buyer’s offer to sellers since there’s a risk that the deal may fall through.
This article was edited by Laura Grace Tarpley.
