What is a Contract Contingency? [Real Estate Insider]

A contract contingency is anything that makes your home purchase conditional. In other words, a contract contingency means that your purchase will be valid as long as the home meets the conditions (contingencies) listed in the contract.

Contingencies provide a safety net for you to back out of a sale without losing your deposit if something goes wrong. They protect the home buyer from any unforeseen issues that they're not professionally trained to detect. Here are a few examples of common contract contingencies. 

Home Inspection

You can buy a home with the contingency that it passes a formal inspection. The cost can vary, but it may cost a home buyer $300–500 for a home inspection. That may sound steep, but paying a few hundred dollars is worth it to avoid a costly surprise down the road!

Whether or not your new home gets a passing grade is up to you—not the home inspector—they will report to you, and you can make the decision. This provides the homebuyer with the flexibility to back out if the inspection reveals any significant problems.  Here are five issues that may cause you to reconsider:

  1. Outdated Electrical Wiring.  With today's families using more gadgets than ever, it's vital to ensure your home's electrical system isn't past its prime. An upgrade may be due if your home inspector finds overloaded outlets or a panel that's wired with too many circuits. Pay close attention to aluminum wiring if it shows up on your home inspection report. It was used between 1965 and the mid-1970s in place of copper. Aluminum poses a dangerous fire hazard due to the potential of overheating at connections.
  2. Foundation Damage.  Do you remember the parable about the wise man who built his home upon the rock? If there's one lesson we learned from that story, it's that your foundation counts! Every home experiences some degree of settling. A qualified home inspector can tell you when a seemingly minor crack spells major trouble. Watch out for bulging or bowing foundation walls, which is a sign of structural weakness that can be expensive to repair.
  3. Septic Tank Failure. If your new home comes with a septic tank, make sure trouble isn't bubbling below the surface. A septic tank that fails can cost thousands of dollars to replace. That's a stinky way to start life in your new home! Foul odors, slow or gurgling drains, and standing water are common symptoms of a septic tank that needs TLC.
  4. Water Intrusion. Water is often called the source of life, but it can wreak havoc when it creeps into places it shouldn't. Your home inspector should investigate any water stains to determine if there's an active leak and to check for the presence of mold. A brown spot on the ceiling, for instance, may indicate a faulty roof, while stains on basement walls can clue you into drainage issues—and neither is a cheap fix.
  5. Mold. A home plagued by mold isn't just gross—it can affect your health. You can typically clean up areas of mold that cover less than 10 square feet on your own without breaking the bank. But extensive growth requires professional help. The cost of removing mold from crawl spaces, walls, and ducts can easily be thousands of dollars, depending on the scope of the damage.

You can also consider getting other professional evaluations like a termite inspection or radon test, depending on the advice of your real estate agent and the age and condition of the home you're purchasing.  Just because your home inspector uncovers an issue doesn't guarantee the seller will fix it.


An appraisal is a formal evaluation of the true value of the property. An appraisal protects you from paying more than the home's real value.  The assessment will determine the market value of the property, and the inspection will verify that the property meets the lender's standards.

Here are the five most common issues - mostly associated with (FHA) Federal Housing Administration loans - and how they can be fixed before loan approval to keep your dreams of homeownership alive:

  1. Paint. Due to lead paint concerns, the home cannot have any evidence of peeling or chipping paint. Commonly found in: Homes built before 1978. Resolution: Repainting or removal of all existing paint is required.
  2. Utilities. All outlets, lights, plumbing, appliances, and heating and cooling systems must be operable and turned on at the primary power source before the inspection. Commonly found in: Vacant properties, real estate-owned properties, short sales, pre-foreclosures. Resolution: Faulty utility fixtures and systems must be repaired or replaced.
  3. Windows. The U.S. Department of Housing and Urban Development (HUD) and some conventional investors require that barred bedroom windows without exterior access must have security release latches. Commonly found in: Garden units and street-level properties in urban areas. Resolution: Windows without security release latches must be modified.
  4. Handrails. All steps and stairways must have handrails to comply with HUD property safety standards. Commonly found in: Properties with more than one floor or elevated/lower-level entrances. Resolution: Handrails must be installed near steps and stairways that don't have them.
  5. Well, Water Supply & Septic Systems.  The well or septic tank and leach lines must be equipped, identifiable, and an acceptable distance from property lines and sources of pollution. Commonly found in: Older properties, rural properties. Resolution: These systems must be updated or replaced if they fail a water well test.

Any issues that fall outside of FHA's minimum standards will need to be squared away before closing.  The good news is that in most cases, property issues uncovered during an FHA appraisal can be resolved quickly.

Final Mortgage Approval

If you do get a mortgage, you'll have a final step before you can close on your home: getting final Approval. Final Approval is what you will need to close on your home. This does not happen until everything an underwriter requested is approved, and a Clear to Close (CTC) is issued.

Whatever you do, don't open a credit card, take on more debt, or change jobs once you're under contract. Plus, any changes in your financial situation can jeopardize your loan process. Don't make these common mistakes which can mess up your final Approval:

  • Making large purchases on credit. The higher your debts become, the less likely it is you can keep your pre-approval. A large purchase affects your debt ratio, as well as your credit score.
  • Opening new credit lines. New credit means more debt. This can bring your credit score down.
  • Significantly changing your credit history. Paying your debts down could bring your credit score down. The algorithm used to come up with a credit score is complicated. If you drudge up an old debt by paying it off now, your credit score could drop despite your effort at making things right.
  • Making unusual deposits. The bank verifies your assets several times during the loan process. Large or inconsistent deposits could raise a red flag. You have to prove where the money came from. You may have to prove you did not incur new debts to obtain the money as well. 

An experienced real estate agent can help you navigate the contingency findings and set priorities for moving forward. If the inspection reveals significant problems with the home, you can ask the seller to fix the problem, reduce the price, or cancel the contract.  Ultimately, you decide whether to walk away or negotiate with the seller, and a lot of that depends on your budget and willingness to take on a major home improvement project.  If the appraisal comes in lower than your offer price, your real estate agent will provide the best guide for what to do next.  

Once you navigate through the contract contingencies, you are finally ready to close on the purchase of your new home!


Sign up below to stay up to date

Mid America Regional Information Systems, Inc. Information from Third Parties, Deemed Reliable but Not Verified.
Equal Housing Opportunity HomeTraq © 2024