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A detailed look into common contingencies in real estate purchase agreements

Monday, October 21, 2019
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Contingencies are common and often necessary elements in every real estate purchase contract. These are conditions that, if not met or fail to satisfy mutually defined circumstances, can nullify a purchase agreement.

Below are common contingencies you can make when buying a home:

Mortgage approval

This type of contingency protects you in the event you are unable to obtain the mortgage you seek. Your purchase agreement with the seller should specify the loan terms and conditions you aim to acquire, including:

  • The type of loan, such as VA or FHA
  • The loan amount, which often corresponds to the agreed upon selling price
  • The loan’s interest rate
  • Loan maturity

The sales transaction will be completed only if you secure a mortgage with the same terms and conditions detailed in the agreement.

For various reasons, the lender may deny your loan application or may offer a different deal from what you prefer. If this happens, you can re-negotiate with the lender, or opt to get out of the purchase agreement. You can refund any earnest money you’ve put down provided you do it before the end of the contingency period.

Insurance approval

With this contingency, the sale is completed only if you are able to secure homeowner’s insurance, which is typically required by lenders. To meet the contingency deadline, you must apply for insurance immediately after signing a purchase agreement.

Cases like claims for mold or other issues found during an inspection can make securing an insurance difficult or more expensive than expected. If you’re unable to get the right insurance, you can choose to get out of the sale and request a refund of your earnest money deposit.

Appraisal

When buying a home, your lender will conduct their own property appraisal, which will determine the loan amount they can offer you. The appraisal contingency states that the sale can be completed only if your lender’s appraisal at least matches the agreed selling price.

If the appraisal comes out lower than the selling price, your options are:

  • Renegotiate the selling price with the seller
  • Renegotiate the appraised value with the lender
  • Accept the appraised value and pay for the difference from your own pocket

If the seller and the lender refuse to renegotiate, and you’re not willing to shoulder the difference, you can opt out of the sale.

A lower appraisal typically only happens in declining market, so it should not be much of a concern when it comes to Metro Atlanta homes for sale, whose prices have been on an upward trend.

Inspection

Unless you agreed to buy the property “as is”, it’s important to arrange for a professional inspection before closing the sale. The inspection may reveal hidden defects and potential problems on the property. In Georgia, some of the issues to watch out for include termites and septic tank problems.

An inspection contingency states the sale can only be completed after the inspection is done and no significant issues are found. If the inspection reveals major concerns, get an estimate of the repair or replacement costs and consider these options:

  • Negotiate for a lower selling price
  • Ask the seller to pay for the costs of repairs
  • Negotiate for a discount on closing to cover repair costs

If you and the seller cannot come to a settlement, you can opt out of the deal or agree to shoulder the repair cost yourself.

The inspection has to be done within the agreed contingency period, which is often 10 to 14 days from the signing of the purchase agreement. Otherwise, you may have to forfeit any earnest money paid.

Sale of another home

If you plan to get the financing for the home from the sale of your current one, you can include a contingency which states the sale can only be completed once you find a buyer and close on your current home.

Many sellers are willing to accept this contingency, but only if they can still market the home “Under Contract”, that is, they may show the home and entertain other buyers until you’re able to close on your property. If you’re unable to sell your present home within the contingency period, the seller is free to close a deal with another buyer.

Final walkthrough

The day before closing, you’re entitled to do a final walkthrough of the home to ensure no damage has been sustained between the time of the purchase contract and closing. It’s also done to confirm that all inspection requests were met. If a problem is found, you can move the closing to another day until the issue is resolved, or opt out of the sale.

For more expert assistance and advice in buying a home, talk to one of the top real estate agents in Atlanta, Natalie Gregory. Give me a call today at 404.550.5113 for more information or send your inquiries via email to Natalie(dotted)Gregory(at)Compass(dotted)com.