modern homeA home purchase contract carries a great deal of responsibility on both parties (the buyer and the seller). The legal document involves many conditions and stipulations that are easy to lose track of, but if done right, the contract can serve as protection for the person buying the property and the party selling it.

Majority of the clauses in a purchase contract pertain to conditions, or what’s also called as contingencies. These items consist of contract requirements so that the sale of the home gets finalized. If you are the buyer, be at peace with the idea that contingencies can protect you from emotional bursts that have probably led to your decision to buy a home. In other words, you may consider contingencies as potential loopholes in the contract that will allow you to withdraw from the contract if some of them are not fulfilled.

This article discusses some of the important contingencies stated in a standard home purchase contract.

Due dates

The statement allows the seller to get all the facts that formed the basis for your offer. It’s possible that the seller wasn’t able to learn about the details of the CMA from his / her agent, and so the letter becomes a good source of information for the seller. Take note that your agent and the seller’s are required by law to present all written documents involved in the purchase to the seller. Writing this letter ensures you that the information reaches the seller.

You have the option to supplement the lower price offer with a higher deposit amount, either as earnest money or a conditional increase once the mortgage financing or contingencies in home inspection are removed.

Once the offer has been forwarded, give the seller some time to assess and think about your offer. Most sellers can read the offer statement within a day, so be patient. However, it might be best to follow up with the seller for a response, because a longer time frame of waiting may allow other offers to come in and jeopardize the chances of your offer from getting accepted by the seller.

Another good technique to boost the attractiveness of your offer is emotional investment. Don’t hesitate to assure the seller that you’re going to take care of the home and treat it properly. Many of the sellers are emotionally attached to the home, so giving them this kind of assurance bodes well to your offer.

Disclosure

After signing the contract for home purchase, the seller is given a few days to send buyers a completed disclosure form. This document is required by several U.S. states to protect buyers from possibly undisclosed problems with the home. A standard disclosure form indicates that the seller has full knowledge of the buyer’s dependence on the contents of the disclosure, and any undisclosed issues will be held liable against the seller or the real estate agent. This is applicable even for “as-is” selling; all defects and issues that could possible decrease the home value and affect a buyer’s decision must be declared by the seller.

Examples of declarations required in a disclosure statement include roof leaks, appliance malfunction, plumbing issues, and pest infestation. The disclosure must also mention any environmental problem – say, leaks in the septic tank – or weather hazards like being in an earthquake fault line.

If the seller is not able to give a disclosure statement to the prospective buyer on or before a pre-selected date, the contract may be rescinded and the buyer may get a refund of the deposit.

Financing

One of the most scrutinized contingency clauses involves financing. The finality of the offer will depend on the details of the mortgage approved for the buyer (approved mortgage amount, terms of payment, interest rate, loan duration, and monthly amortization). Getting pre-approved for a loan will definitely speed things up for this section of the contract, although the homeowner’s insurance and property appraisal will also be required.

  • Property appraisal

Lenders usually require an assessment of the home value. Most financial institutions will grant loan amounts not exceeding 80 percent of the property value. This might cause you problems in case the value from the appraisal turns out to be significantly lower than the purchase price that you have agreed with the seller. In short, you will have to shoulder much more than you originally planned.

In spite of this potential problem, the buyer can still turn thing around. For instance, you can ask for a re-appraisal or even request to use the purchase price as the declared appraisal value. Another option is to include a contingency clause for a re-discussion of the purchase price pending the appraised value of the home.

  • Homeowner’s insurance

Owning a home requires you to pay up for insurance in case of fire and other hazards. This is a requirement of financial institutions before they can grant you a loan. You should be able to purchase an insurance policy for the home before closing. Otherwise, the lender will take out a policy that is more expensive than what you can find on your own. Don’t get the wrong idea that this is a small item that you can simply neglect. If you cannot pay for insurance premiums, the property may be foreclosed.
The kind of insurance policy that you need to take out depends on the location of the home that you’re planning to buy. Some states are prone to hurricanes and floods, and lenders may require you to get insurance for these calamities. You may contact the National Flood Insurance Program or the insurance agency in your state.

Avoid headaches in the closing of the sale by taking out a homeowner’s insurance after signing the contract for purchase. You may arrange for the policy documents to be sent to the closing agent before the closing date.

Some properties have been marked by insurance companies for appearing in several insurance claims in the past. As a result, your request for insurance may either involve a hefty premium or be denied outright. As an added protection for you, ask for a disclosure report from the Comprehensive Loss Underwriting Exchange (CLUE). The report contains all insurance claims within five years for the home you want to buy. Only home sellers and insurance companies can ask for the CLUE report, so tell them that you need a copy.

Sale of buyer’s other property

If you have a property that you’re planning to sell so that its proceeds will be used as payment for the new home that you want to buy, you may include a contingency clause that states this. However, be advised that this clause has a catch: it will make your offer to the seller somewhat weak. This financial insecurity may lead the seller to think twice about selling the home to you.

Satisfactory survey

This clause clarifies the possibility of any part of the property to encroach on a neighboring home, and the approval of the affected neighbors in case there are encroachments. This is particularly useful because as the new home owner, you need to know where the boundaries of your property are. This way, you can modify the home – perhaps install a new garage or a swimming pool – without infuriating your next-door neighbor.

This clause may not be required by law, but if you choose to put this in the contract, you and the seller need to negotiate who will pay for the survey.

Clear and clean title

Some home are still tied to an ongoing mortgage, while others are going through legal battles. If the seller claims that the title of the property is clear, this should be included as a contingency clause in the contract. Some homes are sold by an estate, so you have to verify if there are outstanding estate taxes. If things turn sour, the IRS can charge you as the new owner for failing to pay estate taxes.

Taking out a title insurance will help you ensure that you have clear ownership of the property once you purchase it. It will also clear you of paying for delinquent estate taxes, because the title insurance company will pay it for you.

A standard title insurance policy covers legally recorded information, but it generally excludes “on the ground” elements not found in public records. Take note of these exclusions, because these might bite you in a later time. It’s best to request the seller for a satisfactory survey in order to clarify the property lines.

Special clause for condominiums

Planning to move into a condominium unit? There’s a big probability that you’re going to receive a lot of documents from the condo association. Some of these files specify ground rules in the condominium premises, as well as required payments and dues. You may arrange for a contingency clause that says you need to approve of the documents from the condo association before the purchase pushes through.

Review

If you feel like having another set of eyes to look into the purchase, you may insert a clause that allows the contract to be reviewed and approved by your lawyer or someone close to you (your spouse, for example). This way, your confidant can check the house and give you feedback about your plan to purchase the home. You may even make the home purchase contingent to a review of the neighborhood, so that you have additional time to assess the surrounding community.

Although contingencies are meant to protect you from uncontrollable circumstances and allow you to get out of the contract, remember that these items can also be in favor of the seller in case you fail to meet certain agreements. Bottom line, you should make contingencies your friend when you plan to purchase your home.

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