Realtor Showing Tiny House To Couple

The Home Inspection Contingency Clause Explained

5-Minute Read
Published on January 25, 2021
Share:

In a competitive housing market, you can get caught up in the excitement of finally finding the house that’s right for you. After all, deals are often based on good faith. You may be tempted to skip a home inspection or waive the right to do anything about the findings. However, keeping an inspection contingency in the purchase agreement is key to protecting your rights.

In this article, we’ll go over what a home inspection contingency is and how it works before finishing with how and when you might waive a home inspection contingency. You’ll get a better idea of how to look out for your own interests when buying a home.

Apply for a Mortgage with Quicken Loans®

Call our Home Loans Experts at (800) 251-9080 to begin your mortgage application, or apply online to review your loan options.

Start Your Application

What Is A Home Inspection Contingency?

An inspection contingency requires a professional home inspection within a certain time frame before a real estate contract can become binding. It ensures that the buyer receives vital information and allows them to negotiate repairs, sale price, or even walk away with their earnest money altogether.

Being able to make a contingent offer on a home provides a buyer important protection and negotiating leverage. It enables you to walk away from the home sale if you have certain predefined showstoppers in your purchase agreement. We’ll touch on a few of the other contingencies briefly below, but first let’s go over the basics of home inspection very briefly.

A home inspection involves hiring a real estate professional, usually licensed, to go through a home and give buyers a report on its condition. A standard inspection will go over the home’s structure, appliances and major systems to make sure that everything is working. This includes going over your foundation, roof and attic, major appliances, electrical, plumbing and HVAC systems.

You can also get specialized inspections like pest, chimney and water/sewer inspections at an extra cost. You should get these completed in the same window as your home inspection if you want them done.

In order to have the most enforceable home inspection clause, you and the seller should agree and get in writing the window of time you have to have an inspection completed and written up. This is generally the same limit on time the buyer has to notify the seller of any renegotiations or repairs they would like based on the inspection.

How Inspection Contingencies Work

In order to give an overview of how inspection contingencies work, let’s just start with the best-case scenario. In this version, the buyer’s inspector doesn’t find any major problems with the house – or at least none that the buyer isn’t willing to overlook and fix themselves.

In this case, there are still three steps that need to be taken before the sale can consummate. If you’re getting a mortgage, an appraisal of the property will be required. Your home serves as collateral for the loan and a lender can’t give you more than the home is worth. If you agree to a price and the appraisal comes in low, you might have to bring the difference to the closing renegotiate or walk away.

In order to avoid this, you might put in an appraisal contingency. These are typically structured to say that you won’t pay more than the appraised value or the appraised value plus a defined amount.

Once the home inspection and appraisal are done and all the paperwork is in, you’ll typically get to do a final walk-through around closing day. This allows you to make sure the home is in the condition you anticipated.

Finally, you’ll get to close on the house. This is where you get to sign a lot of legal documents and get the keys.

Of course, not everyone’s process goes that smoothly, and so let’s see how a home inspection contingency can help in the event that there are problems with the home that need to be corrected.

Buyer Requests Further Negotiations

In addition to laying out the amount of time a buyer has to get an inspection done and raise objections, a good inspection contingency should outline what happens when the buyer does wish to raise issues. Typical contingency clauses will give sellers a certain number of days from the time the request is given to agree to make repairs or lower the sales price in compensation.

In the event that the seller doesn’t agree to make repairs or lowering the price, the buyers are then given a certain number of days to decide whether to waive the contingency and buy the property as is or back out of the contract.

In the event that the seller chooses to make repairs, the buyers should take the opportunity at the final walk-through to make sure these repairs are completed to their satisfaction. This is the final opportunity they’ll have to rectify anything before closing.

Buyer Disapproves

Most of these clauses have language in there about a satisfactory inspection. “Satisfactory” gives buyers a lot of latitude. This means that if a buyer finds something that’s going to be an issue and the seller won’t fix it or lower the price, the buyer can back out of the deal.

The benefit of having a home inspection contingency at this point is that backing out pursuant to the clause that allows you to get your earnest money deposit back. Depending on where you live, this is often a percentage of the purchase price, so the deposit can be significant.

How And When To Waive An Inspection Contingency

While never required, it’s always a good idea for homebuyers to get a home inspection. If nothing else, you get an idea of the ship the house is currently in and what to look out for in the future. However, there’s nothing that says you need to act on it.

There are instances in which waving a home inspection contingency can be to your advantage. Sellers want certainty, too. If they can be more certain your offer is likely to get to the closing table because there are less contingencies attached, it could give you a leg up in a multiple-bid situation.

It’s important to realize that if you do this, you’re then on the hook for any repairs that need to be completed. You need to decide whether the house is worth whatever additional investment might be needed in repairs if you waive this contingency.

If you like the house in a competitive market and don’t want to give up your inspection contingency, there are other things you can do to sweeten your offer, like paying a certain amount above the appraised value or offering to pay for all or a portion of the closing costs typically paid by sellers, such as real estate agent commission.

The Bottom Line

A home inspection contingency gives you the right to schedule a home inspection prior to close as a condition of the purchase agreement. You can also use it to potentially negotiate a lower price or having repairs completed based on the findings.

A typical inspection contingency clause contains a time frame during which the buyer is allowed to have an inspection done and raise issues based on it. The seller then has a certain number of days to agree to lower the price or make repairs. If they decline, a buyer has some time to determine whether they want to buy the house as is or void the deal and get their deposit back.

Under certain circumstances and competitive markets, it may make sense to waive your inspection contingency to give the seller some certainty if you really want the house. You can still get the inspection done with the understanding that you’ll handle any repairs yourself. If you don’t wish to give up and inspection contingency, you could pay above appraised value or pay part of the seller’s closing costs in order to make the offer enticing.

Now that you understand inspection contingencies, you can have that much more confidence getting ready to buy a house. For more information, check out our home inspection checklist.

Apply for a Mortgage with Quicken Loans®

Call our Home Loans Experts at (800) 251-9080 to begin your mortgage application, or apply online to review your loan options.

Start Your Application