When you are buying a new home, especially as a first time buyer, you will quickly find there is plenty of vocabulary that you not only need to learn, but need to be very familiar with. One of those new terms is “contingent offer”. When you are house hunting, you’ll need to decide whether or not to make an offer, and if it will include any contingencies.

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What Does “Contingent Offer” Mean?

A contingent offer is an offer with a protective clause to protect the buyer. The contingency states that if the clause isn’t met, the buyer can back out of the purchase, as the contract will be considered void. This protects the buyer from losing money, getting into a deal they can’t afford, or getting involved in a bad deal. The buyer chooses the contingencies they want to include in the offer with the help of their real estate agent. The seller has the option to accept, reject, or counter the contingent offer. You can include one contingency, multiple contingencies, or none when you make your offer, and the seller can respond to each contingency separately.

What are Some Common Contingencies?

There are some contingencies that are almost expected when buying a new home:

  • Inspection Contingency

This clause states that the home will go through a professional inspection, typically paid for by the buyer. If the inspection uncovers an issue that is a deal breaker for the buyer, the buyer can choose to walk away.

  • Appraisal Contingency

If you need a mortgage to buy a house, the bank will typically not approve you for a mortgage greater than the appraised value of a home. The appraised value is based on location, square footage, and several other factors, and is performed by a professional. If the appraised value comes in lower than the agreed upon purchase price, the buyer can walk away or negotiate the price down to the appraised value.

  • Mortgage Contingency

Before you make your offer, you want to be preapproved for your mortgage loan. This means that you are likely to get final approval once your offer is accepted on a house. However, if something changes in the time between the pre approval and approval, your loan may fall through, making it impossible to buy the home. A mortgage contingency does require the buyer to inform the seller as soon as possible.

  • Title Contingency

A title contingency protects the buyer from fraud. This contingency is dependent on all liens and title issues being cleared before the purchase, ensuring that no one else can make a claim on the home.

How Contingency Offers Can Be Impacted by a Seller’s Market

A “clean offer”, which is one with no contingencies, is more common in a seller’s market. When multiple buyers are competing for homes and those homes are selling above asking price, a seller may be drawn to a clean offer, since the sale is guaranteed. In a seller’s market, when a clean offer is presented to the seller alongside a contingent offer, the seller is more likely to go with the sure thing. Your real estate agent can assess the market and advise you on how to put together a strong offer. In a buyer’s market, contingency offers are much more common. Buyers are in a stronger position to negotiate, and sellers may need to accept offers, even if they have contingencies. As you consider when to buy a new home, think about the current state of the market, and look to your experienced real estate agent for guidance.

No-Contingency Offers Can Backfire When Buying a New Home

Clean offers may be more likely to be accepted in a seller’s market, however, a no-contingency offer comes with a real risk. If your offer doesn’t require a home inspection, you may be stuck with a home in need of multiple expensive repairs you didn’t know existed. If you don’t require an appraisal contingency, you could be stuck making up the difference between the purchase price and the appraised amount your mortgage will approve. If you back out of the sale, you will lose your earnest money.

A contingent offer protects the buyer, and most buyers should include an appraisal, mortgage, and inspection contingency in their offer. Most sellers expect those clauses. If you’re ready to buy a new home and you’re looking for a knowledgeable, experienced real estate agent to help guide you through the process, contact Amberwood Real Estate today!