What Is a Contingency in a Home Offer?
By Joe Nelson, Retired Air Force, Nelson Home Group Team Leader and Mortgage Loan Originator
A contingency in a home offer is a condition written into your contract that gives you the right to cancel if that specific thing goes wrong and you act inside its deadline. What happens to your earnest money depends on how the deposit was written, refundable or non-refundable. The three contingencies we see first-time buyers use most are inspection, appraisal, and financing. Each one is an exit door, and each one closes at a different point between contract and keys.
What does a contingency in a home offer actually do?
On the KCRAR contract, one refundable or non-refundable checkbox decides what happens to the deposit when you cancel.
It gives you a lawful way out. When you sign a contract, you deposit earnest money. In the resale contracts our team handles, about one percent of the price is common. That deposit is the seller’s assurance that you are serious. Without contingencies, walking away from the contract means the seller may have a claim on that money. With them, you can cancel for the reason the contingency names, inside its deadline. What happens to the deposit then depends on one checkbox on the KCRAR Residential Real Estate Sale Contract: refundable or non-refundable. Most first-time buyer offers check refundable, and some competitive offers deliberately make a portion non-refundable as a signal to the seller. Know which box you checked. For how and when the deposit gets paid, see earnest money explained.
A contingency is an exit door, and you only get to use it while it is still open. That is the whole concept. The rest of this post is about which doors exist, when each one closes, and if you should ever nail one shut on purpose.
What are the three contingencies most first-time buyers use?
| Contingency | What it protects you from | When it comes off |
|---|---|---|
| Inspection | Buying a house with a problem you did not know about | When the Inspection Period ends (ten calendar days if the blank is empty) without a written notice from you, or when you and the seller resolve your notice |
| Appraisal | Paying more than the lender says the house is worth | Depends on the Appraisal Contingency Addendum option you chose; see below |
| Financing | Losing the house because the loan fell through | Tied to the contract’s Loan Approval Period, which the KCRAR form sets at 45 days from the Effective Date or 5 days before closing, whichever is earlier, if the blanks are left empty. If your loan is not committed by then, the seller can cancel. A written loan denial from your lender lets either side cancel. |
The inspection contingency gets the most attention because it has the hardest deadline. Monday’s post, How Long Is the Inspection Period When Buying a House in Kansas City?, covers how that window gets negotiated. The appraisal contingency matters when the market is moving and the house might not appraise. The financing contingency runs on the Loan Approval Period written into your contract, and the signed contract sets the actual deadline. It is the reason the no-large-purchases rule exists: your loan is not done until it is done.
What happens when a contingency is removed?
If the appraisal comes in low, the KCRAR contract gives both sides five days by default to renegotiate before either can cancel.
The deal gets harder to walk away from. Each contingency that comes off means one more reason you could have canceled is gone. By the time all of them are satisfied, you have agreed to buy the house at that price with that loan, and backing out after that puts your earnest money at risk under the contract’s default terms.
That is the point. Due diligence is designed to move you from uncertain to certain, one contingency at a time. If the inspection comes back clean, the inspection contingency comes off and you are one step closer. If the appraisal comes in at value, that one comes off too. By closing day, there should be nothing left to be uncertain about.
Can you waive a contingency to win a house?
Sometimes, and it is one of the seven levers in the first-time buyer guide. But there is a difference between waiving a contingency and waiving your right to walk, and first-timers get that wrong constantly.
Waiving the inspection is not the same as waiving your right to renegotiate. Our team does not recommend waiving inspections entirely. What we use, when a house is worth it, is the KCRAR In Its Present Condition Addendum, and the box you check matters, because the form has three. The option we recommend keeps your inspections and your right to cancel during the Inspection Period if the results are unsatisfactory, and gives up only the right to renegotiate. In the form’s own words: “BUYER will have the right to cancel the Contract, during the Inspection Period, if the results of the inspections are unsatisfactory. BUYER waives any right to renegotiate.” That signal is powerful to a seller and it keeps your most important exit door open. The second option makes inspections informational only and waives cancellation. The third waives inspections entirely. We do not recommend either of those for a first purchase.
Option 1 of the In Its Present Condition Addendum removes the Inspection Renegotiation Period entirely.
On the appraisal side, the KCRAR Appraisal Contingency Addendum also has three options: cover a gap between appraised value and contract price up to a dollar amount you name, cover the whole gap, or waive the appraisal entirely. The first option is the one that keeps a limit on your exposure. The addendum requires written verification of funds within five days of the Effective Date if the blank is left empty, and we require that proof before we write a gap into an offer at all. For the full picture on what happens if an appraisal comes in low, that post walks through it.
Every one of these is a choice you make, not something you agree to because you want the house. Our job is to educate you on the options. The decision is always yours.
What does a contingency cost you?
Nothing to write it in. The inspections and appraisal that satisfy it cost money, and that is money well spent. What a contingency costs you is competitiveness. In our experience a seller reading two offers will usually prefer the one with fewer ways to fall apart. That is why the levers exist. But an offer with no contingencies on a house you have not inspected is not a strong offer. It is a bet with your earnest money as the stake. The buyers who get hurt are the ones who waived everything to win and then found out what they won.
Frequently Asked Questions
What is a contingency in a real estate contract?
A contingency is a condition in your purchase contract that has to be satisfied for the sale to go through. If it is not satisfied and you act inside the deadline, you can cancel the contract. Whether the earnest money returns depends on whether it was written as refundable. The three we see most for first-time buyers are inspection, appraisal, and financing.
What happens if a contingency is not met?
You have a choice. You can cancel the contract inside the contingency’s deadline, or you can negotiate with the seller to resolve the problem and keep the deal alive. What you cannot do is ignore it. If the inspection deadline passes without written notice from you, the KCRAR form says you have waived your right to cancel or renegotiate over condition.
Should a first-time buyer waive the inspection contingency?
We do not recommend waiving inspections entirely. In a competitive situation, the first option on the KCRAR In Its Present Condition Addendum keeps your inspections and your right to cancel during the Inspection Period, and gives up only the right to renegotiate. The other two options waive more. That first option is a strong signal to a seller without giving up the information you need.
Is earnest money refundable if a contingency fails?
It depends on how the deposit was written. The KCRAR contract has a checkbox for refundable or non-refundable earnest money. A refundable deposit generally comes back when you cancel inside a contingency’s deadline for the reason it names. A non-refundable portion may not. Cancel outside the deadline, or for a reason the contract does not cover, and the seller may have a claim on the deposit.
What is an appraisal gap, and do I have to cover it?
An appraisal gap is the difference between what the lender’s appraiser says the house is worth and what you agreed to pay. With an appraisal contingency, a low appraisal lets you renegotiate or cancel. The KCRAR Appraisal Contingency Addendum lets a buyer offer to cover a gap up to a set amount, cover the whole gap, or waive the appraisal, and it requires written verification of funds. It is always the buyer’s choice.
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Nelson Home Group, Keller Williams KC North, 1508 NW Vivion Rd, #205, Kansas City, MO 64118