Whether you’re a seasoned buyer new to the state, or are a first time buyer in New Jersey, you're probably feeling a lot of excitement and anxiety. There's so much to learn about the home buying process, and its many intricacies in New Jersey, and it can be easy to feel overwhelmed.
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One of the most important things to understand about the home buying process is contingencies. Contingencies are clauses in a real estate contract that allow the buyer to back out of the purchase if certain conditions are not met. There are many different types of contingencies, but some of the most common ones include:
- Financing Contingency: This contingency allows the buyer to back out of the purchase if they are unable to obtain financing.
- Appraisal Contingency: This contingency allows the buyer to back out of the purchase if the appraised value of the home is lower than the purchase price.
- Inspection Contingency: This contingency allows the buyer to back out of the purchase if problems are found during a home inspection.
- Title Contingency: This contingency allows the buyer to back out of the purchase if there are any title problems with the property.
It's important to understand the different types of contingencies and how they can protect you as a buyer, but also how you can leverage these to make your offer stand out in a competitive market. In the next few sections, we’ll go into more detail about each of these contingencies and what they mean for you:
1️⃣ Financing Contingency
Unless you’re one of those lucky buyers who can purchase a home with cash, you will likely need a mortgage from a lender.
And unfortunately there’s no guarantee your mortgage will be approved until the underwriting has been completed and you have the Mortgage Commitment in hand, which can take a few weeks after getting your offer accepted.
This makes financing a contingency, because your offer is naturally contingent on the mortgage going through 🎯
- #1 BUYER TIP: Get your pre-approval. While it’s not guaranteed, even with pre-approval in hand, that your mortgage will clear, it reduces the risk immensely. Submitting your pre-approval letter alongside your offer also looks great to sellers.
2️⃣ Inspection Contingency
It is pretty standard when buying a home that you will be using a home inspector to undertake inspections on the property. This contingency gives you the right to walk away from the sale if any major (or minor! Really, anything that needs repairing or is damage to the property) problems are found, unless you’ve waived part or all of the inspection.
- #1 BUYER TIP: Consider waiving part of the inspection, if you want you offer to stand out amongst the rest. While we’d never encourage anyone to completely waive an inspection (that’s super risky), you could agree to waive up to, for example, $10,000 of items on the inspection. This way the seller is assured you’re not going to nickel and dime them over minor things.
Appraisal Contingency
In a sellers market, there’s a reason why buyers are putting in offers that waive all (or some) of the appraisal gap. And this is super appealing to sellers. First, let’s explain the appraisal:
An appraisal is ordered by a lender, because they want an independent unbiased opinion that you’re not overpaying for the home, using their loan. If you offer $300k on a home they deem worth $250k, it makes the loan too risky for them. And if that’s the case, and you can only get a mortgage for $250k, the seller will be annoyed you cannot pay the full $300k you offered them!
If you do not agree to waive the appraisal gap (by “waiving the gap”, we mean that if the property under-appraises, you agree to bridge the gap with cash), the appraisal is essentially a contingency, because the transaction can fall apart if the home doesn’t appraise.
- #1 BUYER TIP: Unless you have infinite funds, totally waiving the appraisal isn’t an appropriate strategy! But if you could afford to waive some of the appraisal, that looks great to sellers. For example, if a home is listed for $300k, you might put in an offer of $320k, waiving up to $10k if it under-appraises. If the appraiser comes back and says the home is worth the full $320k asking price, you don’t need to bring any extra funds to the table. But if they deem the property only worth $310k, you will have to bridge that gap of $10k. This cannot be financed, so you must have it in your bank account already.
Title Contingency
Mortgage lenders will also usually require you to have a title agency complete a report on your home, and for you to also purchase title insurance. What this does is ensure you’re not buying a home that someone else has a claim to, or if there’s a lien or outstanding lawsuit on the property from unpaid bills or taxes.
Title insurance protects you (but the lender will see it as it protecting them 😉) from you losing your home in the future due to legal issues. And so, if the title agency finds something during their inspection that may cancel the transaction, it’s seen as a contingency.
Home Sale Contigency
This is such a big topic, that we made a whole blog post about it 😉
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Other Contingencies
There are several other contingencies you might want to know about, but before getting overwhelmed, pair up with a trusted real estate agent when you start your househunt so they can let you know this information and how it impacts you personally.
Contingency clauses are an important part of the home buying process and — importantly — they can protect you from making a bad investment and losing your hard-earned money.
But of course in a sellers market it’s important to be flexible when trying to get an offer accepted. If you do include contingencies within your offer, be clear and specific about the conditions that must be met. The more specific you are, the less likely there will be any disagreements later on.
And be prepared to walk away. If the conditions of the contingency are not met, be prepared to walk away from the deal. While it may be heartbreaking to find out the home of your dreams has highly expensive structural damage, if the seller is not willing to fix it to close on the home, you may have to say goodbye to the property — it wasn't meant to be.
