What is a Contingency?

If you're in the market to buy or sell, you'll hear the term "contingency" come up frequently. What does it mean? A simple definition is that a contingency (or contingencies because you can have several) are a way of qualifying your obligation to fulfill a contract. Often you'll hear your attorney or real estate agent refer to contingencies in terms of either removing or waiving them.

What are some common contingencies? Most people, when buying a house, need to get financing. Most contracts therefore have a "Mortgage Contingency." This makes the purchase offer subject to the Buyer obtaining a mortgage loan. If the Buyer acts in good faith to apply for the loan but does not qualify, then they typically can get out of the contract and are entitled to a refund of their deposit.

In New York State, contracts are often contingent on Attorney Approval. Both Buyer and Seller typically have an agreed upon time period to have their attorney review the terms and conditions of the contract with them. The attorney typically will go over the contract with their client to make sure all terms are satisfactory. Either the attorney for Buyer or Seller can cancel the contract at this stage.

Another common contingency is to allow for a home or engineer inspection of the property. This gives the Buyer the opportunity to conduct a professional inspection of the property. If the Buyer is not satisfied with the inspection and/or if the Buyer and Seller can not come to terms on issues that come out of the inspection report, again the Buyer can typically get out of the contract and is entitled to a refund of their deposit.

For first-time buyers, the next contingency doesn't apply but for buyers who have another house to sell the contract is often contingent on "Sale and Transfer of Title." This means that they have to sell -- and close (i.e. transfer title) -- on their current property within a certain time frame. Typically most buyer need to sell their current home in order to get financing on a the property they want to buy. Most buyers do not qualify to have two mortgage loans out at the same time because their debt to income ratio would be too high.

Stay tuned for more on the "Sale and Transfer of Title" contingency in the next post where we will introduce a new term ... the "Bump." Check back on 6/15!