Worried about the home of your dreams becoming the money pit of your nightmares?
There are several contingencies in place during the home buying process to prevent just that from happening!
After your offer has been accepted, there are several steps between the execution of the Purchase Agreement/Agreement of Sale and settlement. Some of those steps are in place to protect you, the buyer. These are called buyer contingencies. Essentially, they are a specific checklist with due dates. If you can’t mark that item off as good/approved, you can say no to the sale and not be penalized (plus get your deposit money back). That is assuming you’ve stuck to the timeline (or due dates) as listed out in the agreement. Your Realtors is a great asset here! All of this will be addressed when you’re putting the offer together and any negotiations that occur. A good Realtor will reiterate these contingencies, how they will protect you, and then make sure everyone sticks to the timeline. Below is a breakdown of what you can expect in most cases:
This is a step that cannot be skipped if you want to make sure there are no problems lurking that you didn’t see when you toured the house. It’s also one of the built-in contingencies in the house buying process to protect the buyer. If something is found during the inspection, like an expensive repair, you can negotiate with the seller for it to be fixed. If they don’t want to pay to fix it, and you aren’t willing to pay for the repair, then you can walk away without any penalties - meaning you can receive your deposit money back.
It’s important to note: During a strong seller’s market, it’ll be tempting (and sometimes advisable) to waive inspections when you’re putting your offer together. Don’t make this decision lightly. Take time to talk with your Realtor about the risks involved with waiving inspections. Take an even closer look at the Seller’s Disclosure, and consider the age of the house and the types of updates/upgrades (or lack thereof) that are needed. This contingency is there to protect you, the buyer, so don’t throw that protection away without fully understanding what that means for this particular sale (that’s right, re-evaluate this EVERY TIME you submit an offer).
In addition to these items, you’ll also need to determine if you want inspections completed, which types of inspections, and the timeframe for when negotiations must be completed by.
This contingencies is the seller’s responsibility. Basically, they have to go through the township/borough and have a separate inspection by them to ensure the sale of the house is approved. Basically, these inspections are looking for any safety hazards: correct number of working smoke & co detectors, railings secured correctly, and if the sidewalk is cracked, etc. Some inspections are more involved than others, and not all townships/borough have this as a requirement for all types of sales. Title will make sure the inspections are completed and that a certification is issued before allowing settlement to be completed. As the buyer, it’s important to know if these are happening. It can delay settlement if there are any issues obtaining the U&O certification, so be aware.
While it’s the sellers responsibility to complete the U&O, this can be a benefit to you as a buyer. These inspections are required to ensure that these homes are, at minimum, safe to be lived in and were maintained to a specific standard. Ask your Realtor whether this is applicable or not to your specific sale.
Some homes will be located in communities with a Homeowners Association. If so, another buyer contingency is receiving their complete set of documents for you to review and approve - and by approve, we really mean that you accept the terms and conditions. Each HOA is different. Some have very extensive rules and regulations, while others have general guidelines. Some are voluntary and others are required to be followed if you’re going to be living there. So to ensure that you’re not jumping into restrictions that you’re not okay with or the additional costs associated with an HOA, you have an opportunity to review everything in advance. The seller will request the docs on your behalf and have them sent to you. You’ll then have a specific timeframe in which to review everything. If you decide the cost is too high or the rules are too restrictive, you must submit the right termination paperwork BEFORE the deadline. That way you can step away from this sale without any penalties and all of your deposit money.
Your realtor (or sometimes your lender) can help get you in touch with someone who will handle the appraisal, as the buyer is typically the one who pays for it. The purpose here is to make sure you aren’t overpaying for your new home, and to make sure you are able to walk away from the deal if that is the case. Should you choose to go through with the deal after the appraisal indicates the home is worth less than the selling price, most lenders will require a higher down payment.
It all depends on the current market situation, the lender you’re obtaining your loan from, and several other factors. This step is almost always required by your lender but the buyer can choose to add a home appraisal contingencies to the Agreement of Sale/Purchase Agreement. In those cases, the addendum allows you to specify the amount of appraisal difference you’d accept before you walk away. This can make it easier for everyone to be on the same page before you even get the contract executed. It’s important to note that during favorable seller’s markets, appraisals can sometimes make sellers choose to dismiss your offer. Again, it’s important you don’t take this step lightly and you fully understand the benefits and risks you take on by including/excluding Appraisal Contingencies for this specific purchase.
Finally, the mortgage contingency, which is less of a contingency and more of a hurdle. We’ll explain why here but first, understand that financing this purchase is important for you too. Becoming “house poor,” meaning you spend all you have on purchasing a house and have nothing left, is NOT a good thing for you. Yes, you’ll be a homeowner but you’ll be struggling to keep that home. This mortgage contingency, while it may not feel like it, is meant to protect you and your ability to keep your home for as long as you want. So while it is challenging, be sure to remember that ultimately this is to help you in the long-term.
While not as much of a contingency as the aforementioned items on this list, the mortgage/financing contingency is another place where the deal can fall through. If you can’t afford a house outright, then you’ll have to take out a loan, which means qualifying for a mortgage. Your credit score, your income-to-debt ratio and any recent major purchases on your credit can have an effect on whether or not you will be approved. Other life events, such as a change in your career, especially if that comes with a lower salary than before, can affect your changes of getting approved for a mortgage. You’ll have a pre-approval before obtaining the executed agreement. From there, you’re on a deadline to submit a final mortgage application that will need to be reviewed by several people/departments, before approved. The approval is what will allow you to go to settlement.
Remember, everything is about timing! The agreement of sale will specify when all of this will need to be done by and if you miss that date then you can lose your ability to walk away with your deposit money. Remember, no one can force you to purchase a home, but there are negative consequences to walking away outside of the specified contingencies. That’s why TIMELINESS IS KEY!!!
(Yes, this is so important of a topic that we’re going to say it again!)
If you want the key to that new house to be in your hands as the new owner, then you need to observe all possible deadlines for the above processes in a timely manner. Buying a house can be a tricky, complicated business, including keeping track of all those important deadlines. This is why having the right realtor or real estate team can make all the difference! Realtors are familiar with this process and can help keep you from missing those deadlines and causing the deal to fall through.
All of the contingencies listed above are there to protect the buyer from having what they thought was the home of their dreams from turning into the stuff of their nightmares. These contingencies can help prevent that from happening, but your best bet is still to get assistance from a realtor to ensure your new house is as wonderful as you hoped it would be.
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