A real estate contract is one of the most important documents you will sign when purchasing a home. Ensuring you are protected in this contract is crucial. When making an offer on a home a buyer can choose to include contingency clauses.

A contingency clause is a certain set of legal terms in a real estate contract that protect the buyer from a variety of circumstances. It gives buyers a legal way to cancel a real estate contract without losing their deposit or threat of legal action from the seller.

Common Contingency Clauses:

Financial – Unless you are buying a home with all cash, having a financial clause is a good thing to consider. A financial contingency clause is put into a contract to ensure that the buyer is able to get financing for the home. This then protects the buyer from being legally bound to purchase a home if the financing falls through. Sometimes these types of clauses will have a set time period to get the loan or even a particular interest rate for the loan.

Inspection – Once you find your dream house, it may appear perfect on the outside but hidden and costly repairs can turn up. It is always best to get the home inspectedby a professional before purchasing a home. An inspection clause essentially gives the buyer a specific period of time to get the house inspected. Depending on the findings in the inspection report the buyer can legally back out of the contract or negotiate repairs with the seller. Foregoing the home inspection is one of 10 common mistakes of home buyers.

Insurance – Insurance contingencies are becoming more popular as many insurance carriers will refuse to insure a home that is located in an area prone to mold, floods, earthquakes and other natural disasters. Not being able to get mortgage insurance is certainly not a good situation so this contingency clause allows the buyer to cancel the contract if that situation occurs.

Related: How to Reduce the Cost of Homeowners Insurance, by Tina Israelson

Appraisal – When purchasing a home and applying for a mortgage, getting an appraisal done on a home is pretty much standard. The independent appraiser looks over the home you wish to purchase and gives it a value. This is where the appraisal contingency comes into play. If you have this clause in your contract, and the appraisal price of the home is less than the price you were going to purchase it for in the contract, you can back out or negotiate a lower price with the seller.

Sale of Current Home – This type of a clause is meant to protect the buyer from having to finalize the purchase of the new home before the current home has sold. While this is a common clause, it can be a turn-off to sellers because the amount of time it will take the buyers home to be sold could take a month or multiple months. If a seller is in a rush to sell their home, this clause may not go over so well. Consult with your Realtor on advice on this situation.

These are the most common types of clauses seen in the real estate industry but there are many others that tend to be more specific to each case. It is also important to note that you can personalize the terms for these clauses to meet your needs. The most important thing to keep in mind if deciding to add contingency clauses to your contract is to work with a professional. Your Realtor or a lawyer can help you formulate legal documents and design contingency clauses. They will help you decide what would work best for you and also keep you in good standing with the seller.

Related Home Buyer Tips

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Protect Yourself With These Creative Contingency Clauses: Realtor.com
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