4 Buyer Contingencies You Need In Your Home Purchase Agreement


As you already know, buying a home is not like any other purchase that you make. For most people, buying a home is an an event that occurs just a few times in their lifetime. It's a big deal and unlike buying a laptop or a pair of jeans, you can't return a house once the deal is done. That's why it's important to make sure you give yourself as many "outs" as possible before the purchase of your next home is final.

What we mean by "outs" is conditions, or contingencies, that must be met before the purchase of the home is finalized. In other words, it's a term in the purchase contract that essentially states "if X happens then buyer may cancel the contract". Typically there is a period of time between signing the contract and "closing" when both parties work to satisfy all of the contingencies. The more contingencies a buyer has, the safer the buyer is from unexpected problems that may arise with the home and its purchase.

While a buyer may come up with as many contingencies as he or she wants (and a seller may not agree with all of them) there are four contingencies that are fairly standard and that should be included in every home purchase agreement.

1. Home Inspection Contingency

This contingency is likely the most common. It allows the buyer to inspect the home, or pay a licensed inspector to do so, and if the buyer is not satisfied with the home's condition (maybe a faulty roof or foundation is discovered), the buyer can back out of the purchase agreement. This condition is really a must-have for any home buyer.

2. Home Appraisal Contingency

Here, the buyer's obligation to purchase the home is conditioned on the appraisal value of the home not being less than the purchase price. Besides not wanting to pay more for something than it's worth, a lender will often not approve a loan for greater than the appraisal value of the home. That's why it's important to include an appraisal contingency in your next home purchase contract.

3. Financing Contingency

This condition is also fairly common. It allows the buyer to cancel the purchase if the buyer is unable to secure a loan on the home. While preapproval letters usually give some indication that an acceptable loan is available, sometimes loans fall through the cracks at the last minute and cannot be obtained. For this reason, it is smart to include a financing contingency so that you are not stuck buying a home without any means to pay for it.

4. Insurance Contingency

While not as commonplace as the others, this contingency may be just as important. This conditions the purchase of the home on the buyer's ability to get homeowner's insurance. Sometimes insurance coverage is denied on older homes (due to potential mold or other problems) or homes that are in high risk areas for natural disasters (such as earthquakes, landslides, or floods). If there is any chance that your insurance coverage may be denied on the new home then this contingency becomes crucial.

These four contingencies are considered the most common and every buyer should make sure they are included in their home purchase agreement. In fact, you only have to check a few boxes in the standard Utah Association of Realtor's Purchase Agreement to include the first three contingencies.

There are others conditions you can add as well, such as a contingency on the buyer selling his or her existing house before having to buy, but these other contingencies often must be negotiated and a seller may not agree to them.

So before you buy your next home, make sure you, or your real estate attorney, have reviewed the purchase contract to ensure you have given yourself enough "outs".  This simple step may up end saving you from buying the wrong home or incurring significant liability.