The three types of contingencies in a real estate transaction
In a real estate transaction, a contingency is a safety hatch in the contract. It creates a legal "out" of the deal if conditions are not met.
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Physical Inspection
This contingency protects you from buying a lemon of a house. Buyers typically have 7-10 days to get an inspector out to the house to examine the home's structure and systems. Once you have the inspection report, the buyer can cancel the contract if the issues are too severe, negotiate for repairs or a price credit, or accept the home as-is. Once the seller and buyer agree on repairs, a contingency removal form is signed.
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Appraisal Contingency
Lenders will not loan you more money than a house is worth. This contingency ensures you are not forced to overpay or lose your deposit if the property appraises for less than the offer price. This contingency is removed once the lender confirms the value supports the loan amount.
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Loan Contingency
Even with a pre-approval letter, final loan approval is not given until a few days before closing; this contingency protects you if you can no longer get the loan. This contingency is removed once the lender issues a clear to close.
In competitive markets, an offer can be submitted with one or all of these contingencies waived.
