There are a few things first-time homebuyers will have to learn about as they enter the mortgage and homebuying market, and one of these that becomes important once you find a home you want to buy is the realm of contingencies. Referring to various conditions found in the contract you sign with the seller of a home when purchasing it, contingencies are important for a wide range of reasons -- but there are also certain cases where some of them may be waived for varying purposes.
At Integrity First Lending, we're happy to provide a host of mortgage and homebuying services to a variety of clients, including first-time homebuyers who are entering the market. What are certain contingencies that are sometimes waived, why is this done, and what should you be considering before you go ahead with this sort of thing in a real estate contract? Here are some simple themes to consider.
One of the most well-known and common contingencies in any homebuying contract is what's known as an inspection contingency. This refers to the condition that the home being purchased must pass a professional home inspection before the deal can move forward -- and if it doesn't, the buyer typically has the right to back out without penalty.
Why waive the inspection contingency? In some cases, buyers may be interested in waiving this particular contingency (at the request of the seller) because they're interested in making a quicker deal. If you're buying a home that's already been inspected and you're confident in its condition, it may make sense to waive this contingency. However, you should only do so if you're completely comfortable with the property -- remember, once you waive this contingency, you're effectively forfeiting your right to back out if something is wrong with the home.
If you have significant concerns about the condition of the property, it's typically best not to waive this contingency.
Another common contingency in a homebuying contract is the financing contingency, which refers to the buyer's ability to obtain financing for the purchase price of the home. This is important because, if a buyer cannot obtain the necessary financing, they will not be able to purchase the home -- meaning that the deal could fall through, and the seller would be free to sell to someone else.
As with the inspection contingency, buyers may be interested in waiving the financing contingency for the sake of making a quicker deal. However, this is generally not recommended unless you're absolutely certain that you can obtain the necessary financing. The last thing you want is to waive this contingency, put down a deposit, and then find out that you can't actually get a loan -- at which point, you would lose your deposit and would not be able to purchase the home.
The appraisal contingency is similar to the inspection contingency, but with a key difference: While inspections are carried out by inspectors hired by the buyer specifically to look for any issues with the home, appraisals are conducted by professional appraisers who work for lending institutions. The purpose of an appraisal is to determine the value of the home being purchased, and this value is used by lenders to help them determine how much they're willing to lend.
First and foremost, we should be clear: There are many situations where waiving the appraisal contingency simply is not possible. Some lenders will not lend money on a home unless there is an appraisal contingency in place, as they feel that this protects them from lending more money than the value of the property.
However, there are some situations where waiving the appraisal contingency may be possible -- but it's important to keep in mind that this could come with some risks. If you waive the appraisal contingency, you are effectively agreeing to purchase the home for the price that is agreed upon in the contract, even if the appraised value of the home comes in lower than that price. If this happens, you'll have to make up the difference in cash, and the difference will often be in the five-figures.
This means that, if you're not confident in the value of the property, it's generally not a good idea to waive the appraisal contingency. However, if you're confident that the property is worth the price you're paying, waiving this contingency could help to move the deal along more quickly.
Due diligence is key when it comes to waiving any sort of contingency in your homebuying contract -- so make sure you understand what you're agreeing to before moving forward.
Title contingencies are relatively uncommon, but they may be included in some homebuying contracts nonetheless. Essentially, a title contingency protects the buyer by giving them the option to back out of the deal if there are any issues with the title of the property.
Issues with the title of a property can arise for a number of reasons, but they typically boil down to two main possibilities: Either there is a problem with the chain of title, or there are outstanding liens on the property.
In either situation, it rarely makes sense for either the buyer or seller to waive the title contingency -- as, if there are any issues with the title, it could result in serious problems down the road. For example, if there are outstanding liens on the property, the buyer may be responsible for paying them off -- and, if the chain of title is not clear, the buyer may not actually end up owning the property they're paying for.
For more on the various contingencies in the homebuying process and what to think about if you're considering waving any of them, or to learn about our mortgage rates or quality home loan services, speak to the team at Integrity First Lending today.
Equal Housing Lender. Integrity First Lending.
NMLS # 1006977
AZ License # 1004274