What Is a Contingency? And What Does It Mean for My First Home?

Buying a house is one of the biggest financial decisions you'll make, so it's important to understand exactly what you're getting into, every step of the way. Contingencies can be a big part of your home buying or selling experience and they can make or break the experience.

What is a contingency?

Simply put, a contingency is any condition that must be met before your sale is final. Contingencies are generally agreed upon by both parties and they will be in the contract you sign. When the contingencies have been met to both parties' satisfaction, the sale will be considered pending until the closing date.

What are some common contingencies?

Some contingencies are more common than others. A sale could be contingent on the buyer's house selling, or on the home inspection coming back clean. The sale could be contingent on the buyer securing financing or a termite inspection. The sale could be contingent on the seller moving the custom-made dog house from the backyard to the side yard, painting it lavender, or removing it completely. Anything can be a contingency, as long as the buyer and seller agree and the conditions are outlined in the contract they've both signed.

What happens when a contingency can't be met?

This may vary depending on where you live, how exactly the contract was written, and how mad the other party is (or isn't). It can mean that the contract is no longer valid and the property is once again on the market. In a worst case scenario, you as a buyer could lose your earnest money. A contingency is a condition of sale and if that condition isn't met, the sale doesn't have to happen.

What happens to my earnest money if a contingency isn't met?

That depends on whether the contingency was on the buyer's or seller's behalf. It also depends on how the contract is worded and whether or not the seller is open to negotiation. In many cases, a seller will return earnest money if your financing doesn't come through, even if you didn't make it a contingency or the house doesn't pass inspection. You'll definitely get your money back if the seller decides to back out of the sale. Often, a seller will return your earnest money out of simple decency. But read your contract carefully because you can't always count on that.

When should a first-time home buyer forgo contingencies?

In a competitive market, first-time home buyers can be tempted to forgo contingencies to make their offer more attractive to the seller, but beware. You'll be in hot water if you decide to forgo the inspection and you're still obligated to buy the house. Or let's say you decide to forgo a financing contingency...and that pre-approval doesn't pan out? Make sure that you can handle the consequences if things don't go the way you think they will.

Contingencies may seem like they're standing in the way of you getting the house of your dreams, but they exist for a reason: to protect the buyer and the seller in case a sale doesn't go as planned. Talk it over with your real estate agent, and make sure you know what you're getting into. Debate the pros and cons of each contingency and make your decision. Good luck!