Contract to Close: An Overview of Removing Contingencies

Once both sides of a real estate purchase have come to contract (meaning both sides are in possession of a contract signed by both parties), the competition has now been eliminated. The seller’s agent should change the status of the listing to specify that it is under contract and let other inquiring agents know that showings are now longer happening.

However, the deal is not locked in yet. There are a few “contingencies” (Google dictionary: a future event or circumstance that is possible but cannot be predicted with certainty) that need to be explored. As the buyer overview diagram illustrates, there are basically three major arms of contingencies that are explored in parallel.

Physical Inspection and Resolution:

If going on a showing with your agent before offering is like a test drive, this is like having a mechanic check out the vehicle before you buy. This is basically step one after receiving a signed purchase agreement. Hiring a certified home inspector to come over to the property and give a thorough look usually uncovers things most buyers would never notice right away. It can be a bit overwhelming to get a laundry list of defects (it’s the inspector’s job to be thorough), but just keep in mind you’re buying a used home. Kind of like a used car, every place will have its quirks. You just want to know what you’re getting yourself into and make sure they’re quirks you can deal with. Upon inspection and depending on the issues, the seller may be willing to fix defects or provide a financial credit to compensate for them. If you can’t come to mutually agreeable terms in a timely fashion, the deal may fall through.

Mortgage Contingency:

The bank has to like the deal as well since it is usually providing the bulk of the funds in this large purchase. They have to like you as a buyer (i.e. think that you can live up to the terms of the mortgage) which is the point of doing pre-qualification. If you’ve made any big financial moves or wracked up credit card debt since your prequal, this could actually jeopardize the bank providing funds. Be smart!

The bank also has to like the property- if a buyer decides to use the bank’s funds to pay more than a property is worth and the bank does not agree with its value (the appraisal determines this), then the bank realizes that they would be at risk of having to sell the property for less than the funds it put up if the you as the buyer were unable to continue paying. Being able take ownership of and sell the property is the bank’s primary means in recovering their investment, so the property worth has to be legitimate. For this reason, the bank will usually require homeowner’s insurance to be in place without any gaps in coverage- if by chance a fire or something else destroys the property after closing but before insurance was in place, the buyer would most likely be unable to absorb the loss and the bank would take a big hit.

If something scares off the lender and no alternative mortgage is provided, this would obviously kill the deal as well unless the buyer has a lot of cash.

Title Encumbrances:

I will admit that I know the least about the ins and outs of these processes. The basic idea, though, is that the buyer needs to know that they will own the property outright once the closing happens. The title company is used to ensure proper procedures are followed to effectively transfer the title to you as the new owner. Your attorney assists with making sure that there are no “encumbrances” (impediments) that will tie up the title. An encumbrance could be a past dispute over ownership that was never officially settled or a lien on the property from a contractor who was never paid by the previous owner. Liens, deed restrictions, and property easements are often tied to the property, so the problem would then become your problem. Even without unusual title issues popping up, the attorney fee is some of the best money spent in the contract to close process.

More to come on each of these!