Understanding the Inspection, Financing & Appraisal Contingencies
There are many aspects of a real estate contract that are designed to protect both buyers and sellers. Unfortunately, they can sometimes be confusing. Keep reading to learn exactly what you need to know about the Inspection, Appraisal and Financing Contingencies!
What is the Inspection Contingency?
This is #12 on the contract. If you leave this blank, the default time is 15 days from the date the contract is signed (AKA the effective date). If your client can shorten this period, it will be a stronger offer. Usually, when transactions fall apart, it is during the inspection period. So, essentially, making that period shorter reduces the risk.
It’s important to note that only the buyer can cancel the contract during the inspection period. The seller cannot terminate it for any reason.
Be sure to negotiate any issues with the inspection report with the sellers. You can send their agent an email saying that you will “cancel the contract” if these items are not met by the end of the inspection period.
Talk to your clients throughout this whole process to let them know where things stand and get input on what they would like to do. If they want to cancel the contract after the inspection period ends, they will lose their deposit, so you want to make sure that you get all of their issues addressed during this period. Always have that end date in the back of your mind.
Note: If the inspection period (date) ends on a weekend or government holiday, it will extend to the next business day.
What is an Appraisal Contingency?
The appraisal contingency is when everyone agrees, as part of the contract, that if the house doesn’t appraise for the amount in the purchase agreement, the buyers can walk away and get their deposit money back.
Which loans have an Appraisal Contingency?
VA, FHA and USDA loans automatically have an appraisal contingency. Conventional loans do not automatically have one and you have to include an Appraisal Contingency Addendum. Unfortunately, this will make the offer weaker.
If the appraisal doesn’t come back as expected- there can be further negotiations. These situations can include the buyer bringing more money to the closing, the buyer and seller splitting the sum or the realtors may shave off a percent. Talk with your clients and see what they want to do in a situation like that.
What is a Financing Contingency?
We saved the one that confuses agents the most for last…If you have any questions, don’t hesitate to reach out at [email protected]
Financing Contingencies are for the protection of the buyer. If they are not approved for a loan for any reason within the contingency date, they will still get their deposit back. For example, if they have not been approved yet and it’s three days before the closing and the lender finally comes back to say they are not approved- they will get their deposit refunded.
The default deadline for the Financing Contingency is 30 days from the date it is signed (the effective date). Your job as a realtor is to know this date and make sure they are either approved or that you have asked the lender and seller’s agent for an extension. Be sure to get a written letter stating there has been an extension from the lender. This is essential to protecting your buyer’s deposit.
Protecting Your Buyer’s Deposit
If your buyer gets approved for their loan within the 30 day period, but for some reason you (the agent) forget to inform the seller’s agent that they are approved, the seller has the right to cancel the contract and your buyer will not get their deposit back. You don’t ever want this to happen.
While this isn’t widely common, it does and can happen if you don’t remember the date of the Financing Contingency. Do yourself a favor and set a reminder in Boomtown, on your phone or post a sticky note on your computer so that you don’t forget that date!
Changes to the Financing Contingency Within The Last Year
Last year there were some changes made to the Financing Contingency that are extremely important:
- The default date has been moved to 30 days instead of 45 days. This means that if you leave this blank on the sales agreement, it will default to 30 days.
- When you are putting in an offer, be sure to talk to the lender to confirm that they can deliver on loan approval in 30 days. If you’re working with a lender that you don’t know, be sure to call them and see how long they typically take to approve someone. For example, if they need 6 weeks to get an approval and your Financing Contingency defaults to 30 days, you will definitely need to negotiate a later date.
- What was previously called Loan Commitment, has now changed to Loan Approval. Buyers will no longer be allowed to have a “commitment” or “pre-approval”, they need to be fully approved for a loan by the Financing Contingency date.
Don’t let these contingencies scare you! Just remember to be aware of the effective date and be mindful of the date each period will end!
At Dalton Wade we believe that today’s buyers and sellers need a trusted resource that can guide them through the complex world of real estate and that’s what we provide to our clients- exceptional service.
We also believe that real estate agents deserve to keep 100% of their commissions. Dalton Wade Agents work on 100% commission, pay a $79 monthly membership fee, pay $79 a closed transaction and are paid at closing! If you’d like to learn more about keeping 100% of your commissions, contact us today!