What does contingency mean? Find out, plus see which are the most important to include in your contract.

Anyone thinking of purchasing a home has likely heard of contingencies. Here's how can they make or break a sale.

For any big purchase in life, working without a safety net can be a risky move, especially when thousands of dollars are on the line. When making an offer to purchase a home, you have the opportunity to protect yourself from the unexpected in a home transaction, and to ensure you’re getting what you’re paying for. This guide will define what exactly a contingency is, how a home’s status changes once a contingent offer is accepted, and recommend a few important contingencies to consider as part of your offer.

What Does Contingent Mean?

Contingencies are clauses in a real estate contract that stipulate conditions for the buyer and the seller to agree upon for a sale to go through. For buyers, contingencies are important because they help protect the party if they’re unable to complete the sale. However, in hot markets where several people may be interested in buying a particular home, many buyers may be tempted to do without contingencies to make their offer look more appealing in a potential bidding war.

What Does Active Contingent Mean?

A home’s status changes to active contingent when a home seller has received an offer from a buyer, but the buyer needs to meet certain conditions before the sale can be finalized. These conditions may include a home inspection or getting approval on a mortgage loan.

Types of Contingencies for Buyers to Consider

  • Mortgage Financing Contingency

    This contingency gives the buyer a way to back out of the contract if an application for financing is denied, or if financing is granted for a lesser amount (say, if the home appraises for less than expected).

  • General Inspection Clause

    This allows buyers to bring in a professional home inspector to inspect the propertyand to cancel or renegotiate the deal. If the inspection turns up a less than satisfactory result, such as significant structural flaws or major costly repairs, buyers have the right to ask the seller to lower the sale price, offer buyer credits, or ask for necessary fixes to be completed before the close of sale.

  • Contingencies for Additional Specialists and Tests

    If the initial inspection turns up issues, additional inspections by specialists or other tests may be required. This contingency allows buyers to have the home checked for things like mold and other toxic substances, as well as wood-destroying pests like termites. It also allows for other specialists like chimney inspectors and foundation experts to come look at the property before the sale is complete. If any problems are found, the buyer should have the opportunity to renegotiate the deal, or cancel it completely.

  • Attorney Review Contingency

    This clause can give the buyer and the seller a specific amount of time, as specified in the contract, to have their legal team inspect the signed contract. The lawyer will review the legality of the contract and check for important safeguards for their client before the deal is done.

  • Buyer’s Home Sale Contingency

    This clause allows the buyer to cancel the contract without penalty if they’re unable to sell their current home in a specified amount of time. This way, if the buyer is under contract to sell their residence and the deal falls through, they won’t be obligated to purchase the new property.

  • Appraisal Contingency

    This clause permits the buyer to have the home appraised—a must for many buyers financing their purchase—and to only follow through with the sale if the appraisal matches or exceeds the home’s price. If you’re using a lender, it’s smart to check to see if they require this contingency as part of your purchase contract.

Contingencies can seem confusing, but understanding them—and including them in your contract—is integral to protecting yourself. Keep learning more below: