What Is Contingency?

Contingency is a term used to describe a potential threat or a negative event such as a natural disaster, terrorist attack, or fraudulent activity that may occur in the future. In real estate, a contingency clause serves as a provision that makes the contract null and void if a particular event occurs. This is oftentimes called a condition wherein investors are provided an escape route under defined circumstances.

A common contingency clause may refer to a mortgage interest rate. That is, if a buyer can obtain a mortgage with an interest rate of 6% or lower, the deal will push through. In this case, the sale is contingent upon the interest rate of a mortgage loan.

Listed below are some of the usual and common contingencies for real estate contracts and transactions:

1. Mortgage Approval

Typically, a contract will indicate that the transaction will only be completed when a buyer’s mortgage is approved substantially under the same terms and numbers stated. For instance, when a down payment of 30 percent and a conventional 30-year loan is specified, the lender will surely have this approved. However, there will be times when the buyer gets offered with a different deal and the terms will change.

2. Insurance Approval

Most lenders would not want to close on a home if the buyer fails to get a home insurance policy. Previous claims for mold infestation and other domestic issues may cause trouble in getting affordable coverage. Therefore, it is vital that the buyer immediately applies for a homeowner insurance to meet the deadlines for a refund if the home can’t be covered for whatever reason.

Other contingencies would include a different appraisal price for the property, unmet closing or funding date, negative inspection results of a foreclosed home, and buyer’s dissatisfaction with the final walk-through. Sometimes, sellers or buyers may also propose other forms of contingencies in the contract as long as these are legally accepted.
 

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