Home purchase contingencies: inspection, financing, appraisal

The four common contingencies

Contingencies belong in the offer, before you sign. See how to make an offer.

Inspection contingency

The CFPB says that if the contract is contingent on a satisfactory inspection, you should be able to cancel without penalty when serious flaws turn up. If repairs are needed, “you may want to negotiate with the seller about who should make or pay for the repairs.” The seller may or may not agree, depending on your contract and local market conditions. You can ask for the work to be done before you move in or for a credit.

Choose “an independent home inspector who is accountable to you,” and attend if you can (CFPB). See what an inspection costs.

FHA loans. The Federal Housing Administration (FHA) gives buyers form HUD-92564-CN, “For Your Protection: Get a Home Inspection.” It says a home inspection “will only occur if you arrange for one; FHA does not perform home inspections.” If you “request an inspection early in the process, you may be able to make your purchase contract contingent on its results.” It also states that an appraisal “does not replace a home inspection,” and that “FHA does not guarantee the value or condition of your new home.” After closing, FHA cannot lend you money for repairs or buy the home back. See FHA loans.

Financing contingency

This one protects you if the loan falls through. Being preapproved does not replace it: see mortgage preapproval. Read your contract for the date by which you must have the loan or ask to cancel, and check that date against your lender’s timeline.

Delay is a risk. The CFPB warns that after you tell the lender you intend to proceed, delays in sending documents can mean “your rate lock could expire.” If your purchase contract has a deadline, “you could lose the home and the deposit.” Compare Loan Estimates first: see the Loan Estimate guide.

Appraisal contingency

Your lender orders an appraisal and must send you a copy. If the value comes in under the price, the CFPB says you “can often use the lower appraised value to negotiate a reduction in the sales price.” If the seller will not lower it, you may be able to cancel the sale, and “depending on the terms of your purchase contract, there may be costs associated with cancelling.” The CFPB adds that those costs are likely small compared to overpaying. If major repairs are needed, the lender can require them before closing, or ask you to set money aside. See home appraisal cost.

Contingencies and your deposit

The deposit is what you put at risk. If the contract ends for a reason it allows, such as a failed contingency, the deposit goes back to you. If you back out for a reason it does not allow, you may lose it. The CFPB notes you may also lose application or appraisal fees paid to the lender. See earnest money.

Where states differ

Contingency periods, standard forms and cancellation rights are set by contract and state practice, not by federal rules. Check your state’s seller disclosure rules and closing costs, and ask your agent or an attorney how deadlines are written locally.