When you make an offer on a home, adding contingencies to the contract protects you from unforeseen issues that can arise before closing. Contingencies reduce the risk you take on when you sign the purchase agreement. However, contingencies can also make your offer less attractive to sellers — especially if they’re receiving other offers without contingencies.
Here’s a look at why some homebuyers decide to waive contingencies as well as the risks associated with doing so.
Contingency Defined
A contingency is a condition listed in your purchase agreement that must be met for the deal to become legally binding. If a listed contingency is not met, the buyer is able to cancel the deal without losing their earnest money deposit.
“A contingency is simply a protective clause that communicates that if the clause isn’t met, the buyer has the right to back out of the purchase,” says Adie Kriegstein, a real estate agent and founder of the NYC Experience Team at Compass in New York City.
Pros and Cons of Including Contingencies in an Offer
Here’s a rundown of some of the benefits and drawbacks of including contingencies in your offer.
Advantages of contingencies
- Reduced risk of unexpected problems before closing on a house.
- Allows you to keep your earnest money if you need to back out of the deal.
- Appraisal and financing contingencies protect you from having to buy a house you can’t afford.
- Inspection contingency and title contingencies protect you from inheriting expensive problems.
Disadvantages of contingencies
- Sellers usually prefer offers with fewer contingencies.
- Sellers may not agree to certain contingencies.
- Contingencies can prolong the closing process.
When To Waive Contingencies
Waiving certain contingencies can help make your offer more attractive. However, doing so increases the risk you’ll take on. Be sure to consult your real estate agent and discuss your options before you start to waive contingencies.
Home inspection contingency
The home inspection is conducted to give you a thorough understanding of the condition of the home. If the inspection reveals serious issues, then the home inspection contingency lets you cancel the deal without penalty or have the repair costs covered by the seller.
Should you waive the home inspection contingency?
It is not advisable to waive the home inspection contingency because you never know if the inspector will find significant damage.
“Home inspection contingencies are one the most important common homebuying contingencies,” says Alex Capozzolo, co-founder of Brotherly Love Real Estate in San Diego. “Around 85% of homebuyers include a home inspection contingency in their purchase agreement.”
If you don’t have a home inspection contingency and the home inspection reveals expensive problems, then the seller may refuse to renegotiate. This means you’ll potentially have to inherit expensive issues with the home — or lose your earnest money deposit and risk legal ramifications if you cancel the deal.
“My professional recommendation would be to incorporate the home inspection and appraisal contingency without fail,” Capozzolo says.
Appraisal contingency
Your mortgage lender will require a licensed third party to conduct a home appraisal to determine the fair market value of the home. Lenders typically won’t loan you an amount that exceeds the value of the home. An appraisal contingency allows you to cancel the deal due to a low appraisal without suffering any penalty.
Should you waive the appraisal contingency?
Unless you’re paying for the home in cash, it’s important to have an appraisal contingency so you don’t have to pay for the difference between the appraised value of the home and the purchase price.
“In a booming market, many buyers tend to remove the appraisal contingency to get their offers accepted,” Capozzolo says. “However, this is risky, as the buyer will have to come up with the money to split the difference if the property does not value enough.”
Mortgage contingency
A mortgage contingency — also known as a financing contingency — allows you to back out of the deal without penalty if you aren’t approved for a mortgage. You can be denied a mortgage even with preapproval if your financial situation changes.
Should you waive the mortgage contingency?
Because so many buyers need to take out a mortgage to buy a home, a mortgage contingency is a reasonable ask.
“The most common contingency I see as a real estate agent is a financing contingency,” Kriegstein says.
Sellers will be less likely to take issue with this contingency if they know you’ve already received mortgage preapproval from a lender. While a preapproval letter is not a guarantee, it gives sellers confidence that you’re likely to secure financing.
Title contingency
The title of a home shows who is the rightful, legal owner of the home. However, even if the seller is listed on the title, there could still be past claims or liens against the property. If the title search reveals that the title isn’t clean, then a title contingency allows you to cancel the deal without losing your earnest money deposit.
Should you waive the title contingency?
A title search is going to be performed as part of the underwriting process. So, you’ll be able to find out whether there are any existing problems with the title before you close, regardless of whether you have a title contingency. Waiving the title contingency comes down to whether you’re willing to gamble your earnest money deposit. After all, you never know what kind of history a home can have.
Home sale contingency
Many homebuyers need to sell their old home in order to afford a new one. If you can’t find a buyer by the deadline outlined in the home sale contingency, then your purchase agreement will be void and your earnest money deposit will be refunded. That is, of course, if you can get this contingency accepted in the purchase agreement.
Should you waive the home sale contingency?
Waiving the home sale contingency makes sense if you are a first-time homebuyer.
“If you are a first-time homebuyer, then the home sale contingency is irrelevant,” Capozzolo says.
It can be tricky to get a seller to agree to a home sale contingency, as they may not have time to wait around until you’ve sold your home — especially if they have other offers.
“As one can imagine this is rarely accepted by a seller as that is a huge risk,” Kriegstein says.
As a result, you may need to waive this contingency. However, if you do waive this contingency and you have a difficult time selling your previous home, you could take out a bridge loan that would cover your new mortgage in the meantime.
Homeowners insurance contingency
A homeowners insurance contingency states the buyer must be able to qualify for a homeowners insurance policy before the sale is finalized. Homes that are older or located in high-risk neighborhoods may not be eligible for coverage from some providers. This contingency protects you if you can’t find a policy.
Should you waive the homeowners insurance contingency?
It’s not advisable to waive a homeowners insurance contingency unless you’re buying the home with cash and have enough income and assets to cover expensive damage to the home. Sellers may also be less accepting of this contingency if they haven’t had any issues securing homeowners insurance themselves.
FAQ
Here are the answers to some frequently asked questions about waiving contingencies.
