Contingencies as Part of the Purchase Contract

Buying a house is probably one of the biggest investments you’ll make in your lifetime. It’s even a bit scary and traumatic to make such an investment, especially if you’re a first time homeowner. With so much to comprehend – mortgages, inspections, insurance, etc. – it can be very overwhelming. Whatever you do, make sure you have contingencies built into your purchase contract. That way you’ll be protected from most problems and issues that arise during the home buying process.

Financial contingency
Even if you’re pre-approved for a mortgage, you might not receive the final approval especially in these tight credit times. Since lenders are toughening up on mortgage requirements (even perhaps from the time you received your pre-approval), it’s imperative that you stipulate in the contract that the sale is contingent upon final mortgage financing. Otherwise, you’ll be liable since the purchase contract is a legally binding instrument.

Another factor that can effect the mortgage approval is the appraisal of the house. If the appraisal comes in short of the sales price, the bank may decide not to lend you the money since they can get stuck with a mortgage that’s worth more than the house. On the other hand, if the appraisal comes in higher than the sales price, then the bank can decide to increase your interest rate. Either way, the financial contingency (sale to go through pending mortgage approval) can cover the buyer in such situations.

Inspection contingency
The inspection contingency is just as important as the financial contingency. If the home inspection turns up thousands and thousands of dollars of repairs that are needed, you might not have the money or be interested in repairing the problems. That’s why you need an "out" in case the inspection turns up lots of negative findings. In these cases, sellers are sometimes willing to make the necessary repairs or lower the price, but other times they’re not, so you have the choice to walk away from the sale. For example, if the home inspector finds that the house is in need of a new roof, either the seller comes down in price, fixes the roof, or you agree to buy the house anyway. If the seller is desperate to sell the property, he’ll usually fix the roof or renegotiate a new sales price.

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