Contingencies In Real Estate Purchase Contract

Written by Gustan Cho

July 8, 2014

A real estate purchase contract is a binding contract for both the home buyer and home seller and home buyers should thoroughly review the real estate purchase contract before signing it, otherwise not only can the earnest money deposit be in jeapardy but the sellers can enforce the real estate purchase contract and sue you.

Three of the most important contingencies you need to make sure it is spelled out is the home inspection contingency, appraisal contingency, and the mortgage contingency.  If any of these contingencies are not met, then you as the home buyer, should be entitled to cancel the real estate purchase contract and get your earnest money back with no questions asked.

Home Inspection, Appraisal, And Mortgage Contingency

Once you get a pre-approval from your mortgage lender, your mortgage lender already has determined that you will qualify for a residential mortgage loan for a specified amount because he or she has already run your credit, saw your income and asset documents, and got an approve/eligible per either DU FINDING or LP FINDINGS from the Automated Underwriting System.  Your next step is to go and find a home and once you selected the right home for you, you enter into a real estate purchase contract.  While your mortgage lender is working in underwriting your mortgage loan, your first step is to get a home inspection, which is optional but highly recommended for all home buyers.  Normally you have ten days from the date of the executed real estate purchase contract to do a home inspection.  If you do have have a home inspection done within the ten day period, you are waiving your home inspection period unless you ask for an extension.  In the event if the home inspection report does not meet your needs and a lot of work needs to be done, you can cancel the real estate purchase contract because a satisfactory home inspection will have been a contingency upon proceeding with the sale of the home.  You can also renegotiate the purchase price if the home inspector finds flaws with the subject property.  If the home inspection reports states foundation or structural flaws with the subject property, it is best to cancel the real estate purchase contract and proceed to look for a different property.

Appraisal Contingency

Appraisal contingency is another contingency that should be on the real estate purchase contract.  If the appraisal does not come in at the purchase price, the home buyer can cancel the real estate purchase contract if the contract states an appraisal contingency.  When a home appraisal comes in lower than the purchase price, the home buyer can either cancel the contract, see if he or she can do an appraisal rebuttal, or renegotiate the purchase price.  Most appraisal rebuttals are not successful and the majority on these types of case scenarios, the seller lowers the sales price to the appraised value of the subject property.  Sometimes the seller and buyer agree to meet in the middle between the original purchase price and the appraised value.  The home buyer needs to come up with 100% of the price increase above the appraised value.  The home buyer’s mortgage loan amount will be based on the appraised value.

Mortgage Contingency

Mortgage contingencies is probably the most important contingency in a real estate purchase contract.  Just because a mortgage loan applicant is pre-approved and got an approve/eligible per automated finding, it does not mean that the mortgage loan applicant is fully approved and the mortgage loan will fund.  Many things can come up during the mortgage approval process where a mortgage denial is possible.  For example, if a mortgage loan applicant cannot provide conditions on a conditional approval, then the mortgage loan application is void and a denial letter will be issued.  In the event if the mortgage loan application is denied, then a denial letter will be issued and due to the mortgage contingecy, the real estate purchase contract will be null and void and the home buyer is entitled to get his or her earnest money back.  In the event if the mortgage underwriter is taking longer than expected to issue a mortgage loan approval, the home buyer will ask for an extension on the mortgage contingency and normally it is granted by the seller.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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