There are 5 Contingencies to Remove When Buying a Home

A Story by Michele Kreinheder | Updated 04/26/2015 8:38pm


There are usually at least five things that have to happen in order to purchase a home.

A phrase Realtors use frequently is “removing contingencies”. Those are very important words that mean, unless certain things happen the property can’t be sold. In other words contracts are written so that buying a home is contingent on the following happening:

Loan Contingency

This one is as simple has it gets. If the buyer can’t get a loan the transaction can’t happen. The lender has 21 days to get the buyers file in order and through underwriting, so buyers should be ready to provide requested items quickly; think bank statements, cancelled checks, records of purchases you may have long forgotten.

Appraisal Contingency

A bit more complicated than the loan contingency, it means the property has to appraise for the offer amount. Should it appraise higher, great, there is no problem. Should it appraise lower, problem.  Say you write an offer for $500,000 and the bank has approved a loan of up to 80% of the value of the home. Note the word value is used and not written offer amount. So now say the home only appraises for $490,000. The bank will only loan you 80% of this amount or $392,000. The options at this point are either the seller agrees to lower his price or the buyer agrees to bring more money to the closing. In order words the price is re-negotiated. Once an agreement is reached this contingency can be removed.

Buyer’s Investigation, including insurability

This is where buyers get to do an inspection of any kind. Usually people hire a professional inspection company and some go further bringing in a roofer, plumber, structural engineer, etc. If issues are found this is the time period to request repairs or credit. The time period for this is usually 17 days but sometimes it is shorter, so buyers should be ready to take a day off work to get this done as soon as possible. Insurability is sometimes overlooked but it is huge. If you can’t insure a property, you won't be able to get a loan.

Disclosure/Reports

All sellers must provide buyers with a form called the Transfer Disclosure Statement which asks very pointed questions about the property, such as what remodeling has occurred, any recurring maintenance issues, etc.  Also each seller must provide the buyer with a Natural Hazard Disclosure that is a professional report on environmental and geographical elements of the property and surrounding area.

Title: Preliminary Report

This is the one contingency that is in place no matter what type of offer is written. An all cash offer can confidently remove the loan, appraisal, inspection and disclosure contingencies, but unless the property's title is free and clear, no title company will insure the transaction and there can be no conveyance of the deed.

There are other possible contingencies that may apply, such has review of HOA documents, the sale of the buyer’s current property, and the purchase of a new home by the sellers.

It is important you and your Realtor pay close attention to the contingency removal time period, especially if you are on the selling end. Time is of the essence is a phrase written into every offer and everyone involved in the sale should heed the warning.

 

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Michele Kreinheder
Real Estate Group
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