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Homebuying Contingencies and When to Consider Waiving Them

What are contingencies in a homebuying contract, and should you ever consider waiving them? Here’s a basic primer.

Homebuying Contingencies and When to Consider Waiving Them

There are several important documents involved in any home purchase, and one of the single most vital is the contract between you and the home seller. There are a number of important components within this agreement, and one set that should never be ignored is the realm of contingencies.

At Supreme Lending, contingencies are just one of numerous areas we assist homebuyers with when they contact us for help with their mortgage needs. What are contingencies in any homebuying situation, what are some examples of the most common contingencies, and what are some situations where you might consider waiving a given contingency? Here are some important themes to be aware of.

What Are Homebuying Contract Contingencies?

In a basic sense, think of contingencies as conditions that must be met for the contract to be fully executed. For our purposes here, we'll be talking about contingencies as they relate to homebuying contracts, but it's worth noting that this term can apply to all sorts of commercial and private contracts.

In a home purchase contract, there are all sorts of contingencies that can be put in place. The most common will be related to loan approval, inspections, title searches, etc. In some cases, the contingency will be automatic—meaning that if the designated condition isn't met by a certain date or time, the contract is automatically null and void—while in other cases, the contingency will be something that can be negotiated between the buyer and seller.

Can Contingencies Be Waived?

Yes. In many cases, certain contingencies can be waived by the buyer without any great risk to their purchase. It's important to note, however, that not all contingencies can or should be waived. Some are in place for very good reasons, and if waived, there could be unnecessary financial or legal risks.

Let’s discuss some of the most common contingencies, plus what you should be thinking about before you consider waiving them as part of your purchase.

Inspection Contingency

A vital part of the homebuying process for many buyers is inspection, which allows you to identify any and all potential problems with the property before you're fully committed to the purchase. In some cases, inspection can even uncover hidden damages that could result in a lower sales price.

The inspection contingency is there to protect you, the buyer, by giving you a way out of the contract if significant damage is found. It also provides a negotiation tool, as you can use the findings of the inspection to request repairs, a price reduction, or some other form of compensation from the seller.

In most cases, waiving this contingency isn’t recommended as there could be potential problems that could be uncovered during inspection, and without the contingency in place, you would have little to no recourse.

If you decide to proceed with waiving an inspection contingency, you should ensure a few things before doing so. For example, have enough financial resources available to address any possible problems that could be uncovered. For another, you should have a thorough understanding of the property and its condition—preferably from someone who has significant experience in home repairs and maintenance.

Financial Contingency

Sometimes known as a loan contingency, a financial contingency ensures that the buyer will be able to secure the necessary financing to complete the purchase. This contingency is in place to protect both the buyer and the seller, as it provides a way out of the contract if the buyer is unable to secure funding.

For homebuyers, this contingency is important because it gives you an out if you're unable to obtain a loan. In a hot housing market, it's not unheard of for buyers to be competing against each other with all-cash offers. If your only contingency is a loan, and your loan falls through, you could find yourself without a home and out of pocket for any earnest money that you put down.

For sellers, this contingency is important because it protects them from buyers who may not be able to actually follow through on the purchase. In a market where homes are selling fast, the last thing a seller wants is to be stuck in a lengthy contract with a buyer who can't actually close on a mortgage.

As with an inspection contingency, it’s not recommended to waive this contingency outright. It offers simple protections that most buyers need, and without it, you could find yourself in a difficult financial situation.

That said, there may be some cases where waiving this contingency makes sense. For example, if you're paying cash for the home or have already been pre-approved for a loan, you may not need the contingency in place. In these cases, it's still important to make sure that you have a solid backup plan in place in case issues arise.

Appraisal Contingency

An appraisal contingency is similar to a financial contingency, in that it protects both the buyer and the seller by ensuring that the property is actually worth the agreed-upon sales price.

For buyers, this contingency is important because it protects you from overpaying for the property. In a hot housing market, it's not uncommon for buyers to end up paying more than the home is actually worth. An appraisal contingency can provide a way out of the contract if this happens.

For sellers, this contingency is important because it protects them from buyers who may try to lowball them after the home is purchased. In a market where homes are selling fast, the last thing a seller wants is to end up in a lengthy contract with a buyer who then tries to renegotiate the price after the sale has been completed.

In most cases, lenders don’t allow waiving an appraisal contingency and require home appraisals to avoid risks. An appraisal contingency offers simple protections that most buyers need, and without it you could end up overpaying for the home.

For more on various homebuying contingencies and whether waiving them might make sense, or to learn about any of our mortgage or refinancing services, contact the team at Supreme Lending.