Home buyer contingencies are items that build in protections for home buyers within a home purchase offer. They are much like traffic lights telling you when to proceed and when to stop. Without them your deposit could be at risk.
Three common types of home buyer contingencies are defined below. Their purpose is to provide a set time period to investigate the property condition, title history and to secure your financing.
The common home buyer contingency periods are 10-17 days. The clock starts at the ratification date of the contract or when your purchase offer is accepted. Nowhere are these more important than when you are considering a Foreclosure or Short Sale home to purchase.
- Property Condition
- Financing
- Title Conditions
These are the most common contingencies found in your purchase contract. They are not required, however your contract should have one or more of these contingencies built in as a stop gap should you have second thoughts. Which home purchase contract contingencies and their best use, is dependent upon the structure of your particular home purchase offer.
The following details their significance and will help you avoid the most serious consequences.
Property Condition: This is usually based on reports like the home buyer property inspection, the termite report, roof report and, when applicable, the fireplace or masonry report.
You may order any number of inspections you deem necessary. Inspections for rural property would be far more extensive than those necessary for a home in the suburbs or condominium. Raw land (dirt) properties require the most expensive and lengthy inspection process’. This would include survey, septic or perk, utility soil, geological etc.
Loan Contingency: The loan approval or financing contingency is used to give you time to gain your loan approval. There is an additional element, the appraisal contingency. These should be tied together. If the home you want to buy appraises at a value equal to or in excess of your offer you won’t have any problem.
The appraisal contingency can cause a problem if it is incorrectly used in the contract. A yellow light. What if the home does not appraise for the amount you offered and you removed your loan contingency? For example, you received your loan approval subject to the appraisal and you removed your loan contingency. What if the home appraisal did not meet the offer price you and the seller agreed on? This should be a red light.
You would likely find yourself in a pickle. It would be up to you to find a way to cover the difference in price. Not a fun place to be. You could negotiate with the seller and ask for help, pull money out of your pocket or hope you have another contingency to use to cancel the contract. I suggest you take measures to prevent that from happening. Make sure the contract uses language that ties the loan approval and home appraisal together.
appraisal note: The new loan disclosure process, that began last July, requires the lender to disclose your costs and allow you 72 hours to review them (commonly called the GFE [good faith estimate]). Often by email (except Wells Fargo). When that is sent to you by email or if your lender sends by regular mail you simply respond to it and that initiates the appraisal order.
The appraisal then occurs. The appraised value simply needs to meet the value that you offered for the home. We then remove appraisal and loan contingency.
Title Conditions: The title search is performed by the title company hired to hold escrow and perform it’s duties as a neutral third party. The title report is necessary to identify any clouds on title. Clouds on title are issues that affect ownership. This would include liens (encumbrances) and ownership rights of other persons attached to the property.
In addition, it clarifies lot lines, easements and the ownership title chain. The title company will provide a preliminary title report during the contingency period that you set forth in your home purchase contract and a final report, an updated version of the preliminary report, is available prior to the transfer of ownership.
Condominium buyers have a few other items to consider and should have these built into any contract. The most common of these is the Home Owners Association documentation. This package will be a comprehensive accounting of the health of the community. It covers the contingencies mentioned earlier and other important items: HOA budget, HOA reserves, HOA meeting minutes covering the past 12 months, articles of incorporation and by laws.
Not as common, yet becoming very important in today’s atmosphere, is to determine if the HOA project, sometimes called a PD or PUD, is FHA approved (for FHA lending) or VA approved if you are considering a VA loan (veteran’s administration).
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Michael Roberts is a licensed California Realtor and real estate investor providing agent representation to home buyers and sellers in the San Fransisco Bay area.
He can be contacted at mroberts@rwnetwork.com or his Website http://www.LosGatosHomesandRealEstateBlog.com
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