Anyone interested in homeownership will quickly find that there are many stages between a home being for sale and sold. One of the key pit stops on the way is when a home is considered to be contingent – and while the term’s meaning can vary somewhat from one home (or real estate agent) to the next, it’s vital for any prospective buyer to have a solid understanding of the concept. Let’s take a closer look at what “contingent” actually means.
A property is considered contingent when the seller has accepted an initial offer from a buyer, but the sale can’t go through until certain conditions – commonly known as contingencies – have been met. These are laid out in the real estate contract, and could involve obligations to be met by the seller, buyer, or both. In the meantime, the home is typically still active on the market, as the buyer collects potential backup offers in case the sale falls through; a home at this stage of the process can also be referred to as active under contract.
That said, it’s not a given that a contingent home is still on the market. If the seller hasn’t put a provision into their contract (often known as a kick-out clause) allowing them to keep showing the home as contingencies are being worked through, they may be obligated to take it off the market right away, but in most cases a contingent home is still on the market. It’s always worth asking your real estate agent to confirm either way.
Types of Real Estate Contingencies
There are number of contingencies that could be included in any real estate contract, but you’ll see a few repeatedly crop up as the most common:
Home Inspection Contingency
A very common contingency is the buyer’s right to a new home inspection by a professional home inspector; many lenders will also insist on an inspection before paying out money for a new mortgage. After all, a seller can claim that their home is safe and in good shape, but they could be painting a rosey picture, basing their evaluation on an old inspection, or be genuinely unaware of structural issues that their home might have.
A home inspector will typically take a detailed look at the home’s interior and exterior. Common issues could include faulty wiring, mold, drainage issues, defective heating systems, inadequate ventilation, pest infestations, asbestos, cracked foundations, or roofs in poor repair.
If a new home inspection uncovers any major health and safety issues, most home inspection contingencies will give the buyer the right to walk away from a sale after a certain time window to consider (often one week). But if they still have their heart set on the home, they may work with the seller to negotiate when and how necessary repairs are made, who pays for them, and whether the home price might be affected.
Issues related to buyer financing are the most common reason why home sales fall through, which is where mortgage contingencies come in. If a buyer plans to rely on a mortgage to pay for a home, their real estate contract will typically include a contingency that could void the sale in the event that their lender retracts their mortgage offer, which is a real possibility.
If you’ve already been approved for a mortgage before submitting your offer on a home, it’s natural to assume that this contingency has been fulfilled – but the truth isn’t so simple. Most lenders will run at least two checks on crucial components of a borrower’s application — particularly their credit score, income, and employment status – both when they first apply for the mortgage, and a week or so before the home sale is set to go through.
There are a number of reasons why a borrower might become less of a strong applicant in a lender’s eyes, like a lowered credit score, change in employment status, increase in debt, or more — see our blog post for more information on common reasons why a mortgage could fall through.
If the buyer can’t come forward with their mortgage after all, a mortgage contingency would nullify the sale, if no alternate financing is put in place.
Home Appraisal Contingency
This type of contingency requires a final appraisal of the home before the sale can be finalized, which ideally should come in close to the agreed-upon purchase price of a home.
In many cases, the home appraisal and mortgage contingencies are closely related. Because lenders are legally unable to pay out more than the home is worth for a mortgage, a buyer could find themselves in an awkward position: Say the owner asks for $400,000, you offer that amount and secure a $400,000 mortgage, only for the appraisal to come in at $380,000. The home appraisal contingency should allow you to walk away in this case, unless the seller lowers their home price.
That said, in a competitive housing market — or one in which factors like neighborhood or convenience might add perceived value to a home – it’s entirely possible that the seller will continue to ask for the original $400,000 price. You can certainly still purchase the home if you’re determined to do so, but you’ll no longer be able to rely on a mortgage to cover the full cost, and will have to close the $20,000 gap with cash or additional financing.
Apart from any issues of buyer financing, there’s also the issue of the home’s actual title, which the seller must be legally able to transfer to the buyer. Title contingencies are put in place in case it turns out that the deed actually hasn’t been cleared to be transferred to a new owner – in which case the sale would be nullified.
Why would a seller be unable to transfer the deed to a new owner? Typically, this would be because the title has an encumbrance on it – or in other words, a claim against the property by someone other than the person currently trying to sell it. This might take the form of a mortgage, easement, or a very often a lien – which means that a creditor can take possession of the property should the homeowner fail to pay their debt, or make payment arrangements for someone else (i.e., the new homeowner) to take the debt over.
It’s important to remember that while these kinds of complications can spring from unpaid taxes, bankruptcy, or other financial difficulties, not all encumbrances are bad; after all, any house with a mortgage automatically has a lien on it, as the lender can repossess the home should the owner fall behind on payments. The prospective new owner just wants to be sure that the home is truly the seller’s home to give, and that it can’t actually be claimed by some third party. A title contingency gives the buyer the right to review a home’s title report and history of ownership before the sale moves forward.
In addition to a title contingency, prospective buyers may want to take out title insurance: a one-time premium which will protect them from anyone who might come forward with a claim for the home, dating from before the new owner bought it.
Home Sale Contingency
When it comes to real estate, timing is everything. A home sale can often be a tricky thing to time, since the buyer and seller will both need to coordinate a transition to their next place of residence.
In the buyer’s case, they’ll be hoping to sell their current home before taking over the mortgage on a new one, to avoid paying two mortgages at once; they may also be depending on the funds from the current home sale to pay for the new home. (That said, it’s worth noting that a number of loans – such as piggyback or bridge loans – are available to homebuyers who’d prefer to snap up their new home even while they wait to sell their current one.)
In the seller’s case, they’ll want to find a new home before selling their current one, to ideally avoid finding themselves with nowhere to live.
Home sale contingencies may be put in place to ensure that the seller, buyer, or both have sold their current home, or found a new one, within a certain time window. In the event that either party misses this deadline, the sale may be nullified, or renegotiated to give that party more time.
What is the Difference Between Contingent and Pending?
One of the more confusing aspects of homebuying is the way that certain terms can be used interchangeably, even though they don’t actually mean the same thing. Whether for external reasons or personal preference, real estate agents and others can use the terms “contingent” and “pending” as though they meant the same thing, but the difference is important.
Contingent and pending describe two related but separate stages in the same process. If a home is contingent, that usually means that the offer has been accepted, but conditions haven’t been met yet; as we noted earlier, a home can also be called active under contract during this stage, if the seller is still accepting offers while the contingencies are being worked through.
If the sale is pending, that means that most if not all contingencies have been met, and the sale is being processed; once a sale is pending, not much remains other than signing the closing papers, typically followed by a five-day attorney review period, during which either party may be free to back out.
Can a Contingency Fall Through?
This can be good or bad news depending on where you sit, but contingencies certainly can fall through. As we mentioned above, financing shortfalls, surprising appraisals or inspections, or failure to find a new home are all reasons why a contingency might not be met, and why a home sale could be thrown out.
It’s also possible for sellers to add an addendum into their contract that enables them to back out of the sale even if all contingencies have been met – or for buyers to make an offer on a home with all contingencies removed, though both of these measures are high-risk for any homebuyer, and should be considered with care.
Can You Make an Offer on a Contingent Listing?
In most cases, prospective homebuyers are absolutely free to make an offer on a contingent listing, as sellers typically don’t take their home off the market until all or most contingencies have been met. If you find that your dream home is listed as contingent or active under contract, the seller is likely still showing the home and accepting backup offers, to have on hand in case the sale they’re currently working on falls through.
If you’d rather steer clear of a high-risk move like removing all contingencies from your offer, it’s still worth strategizing on which contingencies to include, as sellers generally will favor an offer with fewer strings attached. You can also consider including a personal letter explaining why you hope to live in this home.
All of that said, you may still want to limit the amount of time you pour into making an offer on a contingent home, since the majority of contingent sales do go through, and you have much better odds with a home at an earlier stage in the process.
Last Updated on July 20, 2022