6 Common Types Of Home Contingencies for Buyers and Sellers to Know

You’ve found your dream home and you’ve put in an offer. It’s been accepted. Now begins the exciting and fast-moving period from contract to closing — where a lot of important details remain to be hammered out before your home purchase or sale can be finalized. 

Contract contingencies are a common part of the real estate transaction process in Chicagoland, and it is more than likely that your sale will contain one or more contingencies. In short, contingencies in a home purchase contract are clauses that can allow one party or the other back out of the deal, returning the buyer’s earnest money, if certain conditions aren’t met. 

Because they are so common — and can affect a sale in multiple ways — contingencies are an important real estate subject to discuss with your broker at the beginning of the process. Curious what contingencies you might encounter in the Chicagoland market? Here are six of the most common types of home contingencies buyers and sellers should know:

Home Inspection Contingency

Home inspection contingencies are by far the most common, occurring in the majority of home sales. Broadly speaking, if a home inspection contingency is included in the contract, the buyer’s offer can be voided if the inspection turns up problems with the home that the buyer was not aware of at the time of the offer and which the buyer and seller are unable or unwilling to negotiate over or repair. 

Broadly speaking, no home inspection report will ever be completely free of issues. If an inspection contingency is present, the seller may agree to repair the major items flagged by the home inspector, or offer a credit or adjust the sale price to account for the buyer’s need to make the repairs after purchase.

While it may be tempting for buyers in hot markets to forego an inspection contingency, your real estate professional is likely to advise against this decision in most circumstances. Some items that are flagged by an inspector can be expensive and substantial to deal with, including structural issues, pests, or electrical or plumbing problems that must be repaired. If the buyer has included an inspection contingency and one of these large problems is uncovered, the buyer can either negotiate for the seller to perform the repairs, bargain for a price reduction, or walk away without forfeiting their earnest money.

Attorney Review Contingency

In Illinois, all buyers and sellers will have attorneys involved to review home sale contracts, and most home sale contracts are subject to an attorney review contingency. The attorney review contingency period generally lasts five business days, although it is not uncommon for it to be extended to seven or even ten business days. During the attorney review contingency period, the attorneys will advise the parties on the implications of the contract terms and negotiate different terms if necessary. If the title search turns up a potential cloud on title, the attorneys will work together to resolve any issues that can be resolved, and will communicate any questions related to the inspection or necessary repairs. During these negotiations, either party may walk away from the home sale if there is a failure to agree upon mutually acceptable terms.

Title Contingency

The title search process allows both the buyer and seller to ensure that the seller has clear title to the property being sold. Following the title search, a title insurance policy is issued. Like most forms of insurance, a title insurance policy helps protect from financial loss. However, title insurance covers the costs associated with past problems or issues with the title of your property, which may not be discovered until some time in the future. Broadly speaking, there are two main types of title insurance — one for homebuyers, and one for lenders. Each type protects a different party involved in the home sale.

While uncommon, title defects do occur, and can include unsettled tax or mechanics liens, unknown heirs, or unclear distributions in bankruptcy. Defects of title can interfere with the ability to secure financing for the property, and can result in a total loss to the purchaser if a prior claim is found. 

If a title contingency is present, discovery of a defect on title permits the buyer to back out of a contract without penalty if the attorneys or title company cannot resolve the defect. While most title issues can be resolved, a title contingency is an important protection for purchasers, allowing them to withdraw from a deal if a title is uninsurable or defective.

Financing Contingency

A financing contingency or loan contingency occurs when the buyer’s offer is made contingent on the buyer obtaining financing from a lender. This is a very common contingency, designed to safeguard against the event that the buyer will not be able to finalize a mortgage contract. 

As anyone who has ever taken out a mortgage knows, any number of complex moving parts are required in order to finalize mortgage financing. Ensuring the buyer’s creditworthiness, confirming the value of the property in question, and finalizing the terms of the mortgage can be a stressful and intensive process, and is often one of the most time-consuming part of the escrow and closing process.

If, for some reason, the buyer cannot finalize a mortgage agreement, the financing contingency allows the offer to be canceled without the loss of the buyer’s earnest money.

Mortgage preapprovals can help streamline this process and prevent a deal falling apart. With a preapproval, the buyer obtains confirmation from a mortgage lender that they qualify for a mortgage under certain conditions, usually for a set window of time. The buyer can present the seller with a preapproval letter from their lender stating the buyer is approved for a certain amount under specific terms. In addition to streamlining the financing process, having a preapproval letter in hand helps put buyers in a very strong position during the transaction, offering leverage and communicating to sellers that you are serious about purchasing their home. 

Appraisal Contingency

As part of securing a loan, the mortgage lender will generally require an appraisal. A lender’s appraisal is a professional opinion of a home’s value. For lenders, the appraisal is essentially a confirmation that the home is worth the money the lender is lending to the purchaser. To determine a home’s value, the appraiser will broadly consider the home’s condition, location, and features.

With an appraisal contingency, the sale is contingent upon the home’s appraised value meeting the lender’s requirements. In addition to considering local market conditions and recent sales data, the lender’s appraiser may go onsite to the property to measure its square footage of the home, the condition of the property, where it is situated in the neighborhood, renovations, features and finish-outs, backyard amenities, and other considerations. 

If an appraisal comes in substantially lower than the asking price, the buyer and seller may negotiate to lower the asking price to match the assessed value, or the buyer may make up the difference by increasing their downpayment; seek a new loan with different terms; or elect to pay private mortgage insurance. If none of the parties is willing to make concessions, the appraisal and financing contingencies generally mean that the buyer can withdraw from the deal without forfeiting their earnest money deposit.

Home Sale Contingency

It is not uncommon for some buyers to find themselves in a situation in which they must sell their current home before they can afford to buy their next home. In these situations, the buyer will sometimes seek a home sale contingency, in which they do not have to finalize the contract of sale until their current home is sold. 

These contingencies are not popular with sellers for obvious reasons, and are often simply functionally unavailable or unworkable in a highly competitive seller’s market. Faced with two identical offers, one that includes a home-sale contingency and one that does not, the seller will often more than likely choose the non-contingent offer. 

When Home Means More, You Need A Team With More To Offer

Home is about so much more than just four walls. Buying or selling a home is a big deal, and with everything we experienced in 2020, our homes have never been more important. That’s why your local Baird & Warner agent is with you at every step of the way, from finding the perfect home to connecting you with local experts in mortgage and title. Whether it’s the beginning of a story or the end of a chapter, we’re here to help.

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