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  • Nick Hoard

Understanding Contingency Clauses in Home Purchase Contracts

Updated: Aug 26, 2021

If you’re a buyer or a seller of a real estate property, you have to understand the different contingency clauses before signing any contract. These clauses are significant factors in the transaction as a whole, and it’s only vital that you know each one of them.


What Are Contingency Clauses?


Contingency clauses are a set of conditions that must be met by either or both parties of the transaction. That makes the contract binding. Moreover, contingency clauses will only make a contract valid if both parties agreed to the conditions stated therein.


5 Contingency Clauses


Without further ado, here are the contingency clauses in home purchase contracts:


1. Appraisal Contingency


This contingency clause focuses on protecting the buyer by stating the property’s minimum specified amount. If the property does not appraise at the least stated amount, the contract will be terminated, and the buyer will return the money.


An appraisal contingency lets the buyer purchase the property even if the value is below the specified amount in a limited number of days after the buyer receives the notice. If the buyer fails to notify the seller of any issues concerning the appraisal at the stated date, the contingency will be tagged as satisfied. That forces the buyer to proceed with the sale.


2. House Sale Contingency


You should sell your existing property before buying another one in any case. But when that does not happen, a house sale contingency protects the buyer as it provides them time to sell and settle their existing property to finance a new one. If the existing property does not sell at the least asking price, the buyer can walk away from the contract free of any legal responsibility.


In the case of the seller, the contingency can be challenging since they may be forced to reject an offer while waiting for the result of the contingency. Still, the seller is also given the right to walk away from the contract if the buyer’s property isn’t sold within the specified time as stated in the contingency.


3. Kick-Out Contingency


This contingency protects the sellers against the house sale contingency. It states that though the seller agrees to a house sale contingency, they will still be permitted to market the property. Suppose another buyer gives an offer during the contingency period. In that case, the current buyer will be given a limited time to remove the house sale contingency and keep the contract alive. Or else the seller can walk away from the contract and sell the property to the new buyer.


4. Financing Contingency


This contingency clause is also called the mortgage contingency since it gives the buyer time to file and apply for a loan to finance the property’s purchase. This contingency protects the buyer as it gives them enough time to walk away from the contract and refund their earnest money if they fail to secure financing from the bank, mortgage lender, or private lender.


A specific amount of time is stated in the contingency clause, giving the buyer the right to terminate the contract or request an extension to which the seller should agree in writing. If the buyer fails to do so within the stated date, they are obligated to purchase the property even without a loan.


Conclusion


Contingency clauses are meant to protect both the buyer and the seller in a home purchase contract. All these clauses work to make the sale more efficient and smooth for both parties, and it helps avoid issues that otherwise can’t be resolved without them.


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